The Centre will mop up at least Rs 3,000 crore extra revenue in the next fiscal from the change in dividend tax nomenclature because of additional tax liability on companies.
This is because the dividend income that companies earn from others will now be taxed at 35 per cent, instead of the 10 per cent flat rate the government had been levying so far on dividend income at the point of distribution.
The gain for the government is net of the Rs 1,000 crore tax revenue it will forgo on dividend that it receives from public sector companies.
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An analysis by the finance ministry has shown that total dividend income in the economy is about Rs 41,000 crore, inclusive of the Rs 18,000 crore that accrues to the government from the public sector, financial institutions and the Reserve Bank of India. Accordingly, the net dividend income available for taxation will be Rs 23,000 crore.
Since the bulk of the dividend income accrues to companies, at a rate of 35 per cent, the dividend tax will amount to Rs 8,000 crore. The additional liability for the companies will thus be Rs 5,700 crore because the dividend income is already subject to a 10 per cent rate tax.
Tax analysts said that figure was a ballpark figure and corrections would have to be made for the various exemptions that the tax regime provides. They said this would include a substantial correction for the dividend that flows out to countries like Mauritius which have large investments in India.
As per the double taxation avoidance agreement with Mauritius, dividend income is taxed only at 5 per cent. Some categories of non-resident Indians have also got exemptions. Similarly, the revised provisions of Section 80M have exempted from tax inter-company dividends.
Besides, the party for the government can be ruined by exemptions enjoyed by trusts. Analysts said making corrections for these exemptions, the actual additional accrual would be closer to Rs 3,000 crore.