Dividend tax change: Who gains,

who loses
PSUs and MNCs, who account for much of the
dividend pool, may pay out more while
promoter-controlled companies may skimp
Aarati Krishnan

The Union Budget for 2020-21 was not too liberal with its
giveaways. But one giveaway that has received mixed reviews from
its recipients is the proposal to abolish the Dividend Distribution Tax
(DDT). While the government claims that this change will result in
tax foregone of ₹25,000 crore, big stock market investors are ruing
the sharp spike in their tax outgo.

The paradox is explained by the fact that, while some categories of

https://www.thehindubusinessline.com/opinion/columns/aara…dend-tax-change-who-gains-who-loses/article30764201.ece 29/03/20, 12:41 AM

Page 1 of 6
 equity investors will get to enjoy lower tax incidence on dividend
receipts after the DDT abolition, others will end up paying through
their nose.

Under the current tax regime (until March 31, 2020), companies
distributing dividends are liable to pay tax at an effective rate of
20.56 per cent directly to the government from their surpluses.
Effectively, out of every ₹100 in distributable profits, companies had
to cough up ₹20.56 as tax, with only ₹79.44 left for distribution to
shareholders.

While this makes the government’s job of collecting taxes easy, it

results in all the shareholders of a company suffering a uniform tax
rate on their dividends, irrespective of whether they are humble
salary-earners or the Birlas, Ambanis and Jhunjhunwalas of
investing.

The abolition of the DDT puts an end to this broad-brush treatment,

by requiring all equity investors to treat their dividend receipts as
income and pay taxes on it at their applicable slab rates, as per the
classical system of dividend taxation that is widely prevalent
globally. While this change enables companies to share their entire
distributable profits with shareholders, its impact on dividend
receivers is uneven.

Winners and losers

There seem to be four distinct sets of gainers from the abolition of
the DDT. One, retail investors with a total income of upto ₹10 lakh a
year no longer need to suffer the flat 20.56 per cent imposition on
their dividend receipts when their own slab rates are much lower.
Two, domestic mutual funds/asset managers who enjoy pass-

https://www.thehindubusinessline.com/opinion/columns/aara…dend-tax-change-who-gains-who-loses/article30764201.ece 29/03/20, 12:41 AM

Page 2 of 6
 through status and pay no tax can pocket larger dividend incomes
from their portfolios, as they will no longer suffer the indirect
incidence of the DDT.

Three, Foreign Portfolio Investors (FPIs) structured as corporates

can now pay tax on dividends earned in India at either 20 per cent
or lower rates, specified in tax treaties inked by their home
countries. These rates can be as low as 5 per cent in some cases.

Four, multinationals and foreign companies that receive dividends

from their Indian subsidiaries will also enjoy a regime similar to
corporate FPIs. As an added sweetener, many of them can now
claim credit for taxes paid on dividends received in India when
assessed for corporate tax back home. This set-off wasn’t available
with the DDT.

The losers fall into four categories too. One, individual investors in
stocks whose income exceeds ₹10 lakh a year will shell out an
effective tax of 31.2 per cent on their dividends, instead of a flat
20.56 per cent under the DDT. Those whose income tops ₹50 lakh,
₹1 crore and ₹2 crore will now find the hefty super-rich surcharges
taking a big bite out of their dividend income too. For them, this will
mean parting with an effective tax of 34.3 per cent, 35.8 per cent
and 39 per cent, respectively, on dividend income. High net-worth
equity investors with income of over ₹5 crore a year will now pay an
eye-watering 42.74 per cent tax on their dividend receipts.

Which brings us to the second category; most big-name promoters

of India Inc, who are likely to fall in this ₹5 crore category, will have
to pay up the 42.74 per cent effective tax on dividends.

Three, insurance companies and other corporate investors in

shares, who do not enjoy a pass-through status like mutual funds,

https://www.thehindubusinessline.com/opinion/columns/aara…dend-tax-change-who-gains-who-loses/article30764201.ece 29/03/20, 12:41 AM

Page 3 of 6
 may see a dent to their incomes from paying tax on dividends at the
corporate tax rate. However, this blow has been somewhat softened
by the Budget restoring Section 80M benefits, which allows
companies to net out the dividends they distribute to their
shareholders from the dividend income they receive, while paying
corporate tax.

Four, NRI investors and FPIs structured as non-corporates will not

reap the benefit of the 20 per cent tax rate on dividends enjoyed by
other foreign investors, and may need to pay taxes at their slab
rates.

Who’ll pay more

The uneven impact of the DDT abolition, as detailed above,
suggests that there’s going to be an active tug-of-war between
different classes of shareholders from the next fiscal, with each
faction trying to alter the dividend policies of India Inc to its benefit.

Some quick number-crunching on 1,752 NSE-listed companies last

fiscal (FY19), based on the Capitaline database, showed that only
938 of them paid out a dividend last year, with the payout
aggregating to about ₹2 lakh crore. Of this, promoters (Indian and
foreign) took home the lion’s share of about ₹1 lakh crore in
dividends, FPIs pocketed about ₹37,000 crore, domestic mutual
funds earned ₹16,000 crore, insurers ₹11,500 crore. Larger retail
investors (holding over ₹1 lakh nominal value of shares) earned
about ₹3,300 crore, while smaller retail investors pocketed ₹12,200
crore (the rest went to NRIs, corporate bodies, etc).

But big picture apart, whether individual companies will distribute

more of their DDT savings, or simply sit on them, will depend on

https://www.thehindubusinessline.com/opinion/columns/aara…dend-tax-change-who-gains-who-loses/article30764201.ece 29/03/20, 12:41 AM

Page 4 of 6
 their ownership pattern and the clout that different categories of
shareholders exercise on their dividend polices.

Based on where their promoters stand, two large classes of

companies are quite likely to see their dividend payouts go up
sharply — public sector undertakings (PSUs) and MNCs (including
companies with foreign promoters). In the case of PSUs, given that
their largest shareholder (the government) isn’t liable to income tax,
it is very likely that it will insist on all the savings from the DDT
abolition being paid out as dividends. PSU stocks, some of which
are already high-dividend yield, may have reason to up their payouts
further in future. Given that dividends are the key route through
which local arms of MNCs/foreign companies share their profits with
their parents, they are also likely to raise their payouts in the future.

Of the 938 dividend payers last year, there were 58 PSUs and 108
companies were with MNCs or foreign parents. Despite their small
numbers, these two sets of firms made up nearly 49 per cent of the
dividend pool, with PSUs distributing about ₹64,500 crore and
foreign-owned companies paying ₹34,000 crore.

Of the companies with Indian promoters, 288 are widely held with
promoter holdings of less than 50 per cent. These paid out ₹56,638
crore as dividends last year. In these companies, institutional
investors may have sufficient clout to keep up the current dividend
rates.

However, the promoter-dominated faction of India Inc, which

accounts for 484 companies of the 938 and paid ₹54,500 crore in
dividends last fiscal, may very well skimp on dividends and explore
buybacks from next fiscal. This faction, though, makes up just 28
per cent of the dividend pool. Therefore, overall, the abolition of the

https://www.thehindubusinessline.com/opinion/columns/aara…dend-tax-change-who-gains-who-loses/article30764201.ece 29/03/20, 12:41 AM

Page 5 of 6
 DDT is likely to improve the attractiveness of Indian markets to
foreign investors and domestic retail investors, from a dividend yield
perspective. But the super-rich taxation on dividends flowing back
to India Inc’s promoters, who are the primary risk-takers in the
economy, may also mean less cash flows and appetite for investing
in new ventures/projects from domestic entrepreneurs.

https://www.thehindubusinessline.com/opinion/columns/aara…dend-tax-change-who-gains-who-loses/article30764201.ece 29/03/20, 12:41 AM

Page 6 of 6