Tax dividends in the shareholders’ hands
.Taxation of dividends has become a vexatious issue, needlessly. It should be taxed in the hands of the investor at the rate applicable to the investor’s income bracket. The finance minister has indicated that the rate would be lowered in the interest of economic efficiency and that is welcome. The dividend distribution tax should be scrapped. To make sure that dividend income does not go under-reported, companies can be mandated to deduct tax at source at the highest marginal rate of 30%, leaving it to individuals whose incomes warrant a lower rate of tax to claim a refund while filing returns. The government has to make the processing of claims and refunds fast and efficient, that is all.
At present, companies pay a dividend distribution tax at the rate of 15%. Individuals who receive dividend income in excess of .`10 lakh pay a dividend tax of 10%. So dividends bear a tax of 25% at most. This is not an equitable way of taxing people. Company promoters who get the bulk of their income as dividends pay a lower proportion of their income as tax as compared to employees who receive the bulk of their income as salaries taxable at the highest marginal rate. Taxing dividends in the hands of the shareholder would both be fairer and more revenue-efficient than the current arrangement.
The debate that should begin on taxing dividends is whether to allow the cost of equity capital the same deductible expense status as interest, the cost of debt capital. This would do away with artificial demand for debt — borrowing is tax-efficient, even if you do not really need that loan — and encourage companies to retain only as much earnings as they have use for. Uninvested cash surpluses on company books are a drag on the economy. This, of course, is a global debate.
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