Dividend tax on firms likely to go

Corporate tax rate could remain unchanged.

The finance ministry is considering doing away with the dividend tax currently levied on companies, instead of slashing the corporate tax rate to 30 per cent in Budget 2004-05.

This will help the ministry eliminate a significant irritant for domestic industry, which has been claiming that a 10 per cent tax on dividends distributed by them is in the nature of double taxation. This is because companies pay a corporate tax on their profits before they declare dividends.

Government sources said Finance Minister P Chidambaram would have limited room to manoeuvre in the case of direct taxes, as he would need to maintain receipts at the same robust level as in 2003-04.

They said to keep tax receipts growing at the pace required by the Fiscal Responsibility and Budget Management Act, the minister would have to "shuffle his tax cards, to please taxpayers".

The sources said a reduction in the corporate tax rate from the existing 36.75 per cent to 30 per cent would not lead to a rise in receipts, unless the plethora of exemptions were done away with. The sources said unlike income tax, where collection could rise if rates went down, corporate tax revenue was not rate elastic.

In 2003-04, corporate tax has showed the most significant rise in receipts at 25 per cent. The total collection has jumped to Rs 62,986 crore from Rs 44,700 crore in 2002-03. For the current fiscal too, the department has projected a 25 per cent rise in corporate tax receipts, provided the rates do not change.

Among the major central taxes, collection from Customs and excise duties are stagnant, while receipts from income tax are growing at a sluggish 15 per cent.

In these circumstances, Chidambaram would find it difficult to cut the corporate tax rate, the sources said. Taking a call on dividend taxes was also difficult, they pointed out. The government earns around Rs 6,000 crore a year from the tax, but it is easier than slashing the corporate tax rate.

The report of the task force on direct taxes headed by Vijay Kelkar, adviser to the finance minister, has suggested elimination of the dividend tax and reduction of the corporate tax rate to 30 per cent to integrate the tax system.

But it has added that such reduction should be done only after eliminating "the divergence between the taxable base for companies and accounting profits, which generally arises due to various tax incentives and artificial deductions".

Easier option

• The dividend tax is easier to scrap than reducing the corporate tax to 30%
• Industry claims the dividend tax is double taxation
• The government earns around Rs 6,000 crore a year from the dividend tax