Finance Minister Nirmala Sitaraman Budget 2020 proposal to abolish dividend distribution tax (DDT) on dividends paid by the corporates and transfer the tax burden completely in the hands of the recipient is likely to trigger interim dividend announcement in March by companies with high promoter holding before the new budget proposal, takes effect from April.
Most promoter-owners hold equity individually or in trusts, and are in the upper tax bracket. So, they will now have to pay 43% tax on dividends from April 1.
FM proposed a revision in section 80M (of the Income-Tax Act), for a dividend-paying company it can avail deduction to the extent of dividend received or distributed, whichever is less.
There could be a rush of interim dividend announcements similar to what happened in March 2007 after the presentation of the 2007-08 Budget, when the then finance minister P Chidambaram proposed an increase in dividend distribution tax (DDT) to 15% from 12.5%.
A record 300 companies listed on the BSE and NSE announced their plans to pay interim dividends.
A similar rush to pay an interim dividend was witnessed in 2002 when the then finance minister Yashwant Sinha had proposed to make dividends taxable in the hands of the shareholders.
Leading companies with high promoter holdings are Vedanta, RIL, Bajaj Auto, Godrej Consumer, Graphite, HCL Technology, Hero MotoCorp, Asian Paints, JSW Steel, Tech Mahindra, etc.
Post abolition of DDT investors will have to pay according to their respective tax slabs, which are as high as 43%
Net net we believe that the move to tax Dividends by way of DDT in the hands of investors is likely to mean higher dividends before this financial year ends, which could increase the dividend yield for many large cash-rich companies that have good cash flow generating businesses.
Alternatively, we also believe that after the 31st March 2020 deadline expires, most of the corporates are likely to go for buybacks as these would be more tax-friendly as compared to dividends paid by such companies to there shareholders.
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