The government will lose at least Rs 1,000 crore of tax revenue next fiscal because of the change in dividend tax collection norms.
The potential loss to the government accrues because it has decided to tax dividends at the hand of the recipients instead of companies. As a result, public sector companies and financial institutions, which pay a large percentage of their dividend to the government, will now be relieved of paying the dividend tax. Since the government, which is the dividend receiver in this case, is not a tax-paying entity, the revenue department will lose several thousand crores it was earning till this fiscal.
According to the budget projections for 2002-03, dividends from public sector enterprises are estimated at Rs 8,044 crore. In addition, dividends from financial institutions and public sector banks are estimated at Rs 10,761 crore, making it a neat Rs 18,805 crore. If one excludes the surplus from the Reserve Bank of India, which is Rs 9,300 crore for the current fiscal, it will still amount to Rs 951 crore, on a conservative note.
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However, this figure is likely to be exceeded handsomely as the Centre has, of late, started asking public sector companies to cough up special dividends before disinvestment.
In this fiscal, Videsh Sanchar Nigam Ltd paid Rs 4,000 crore as a special dividend to the government. Compared to the 2001-02 budget estimate of Rs 5,419.5 crore on this head, the revised estimate was almost double at Rs 10,295.78 crore. It is expected the Centre will repeat the exercise in 2002-03 also.
In the last fiscal, of 243 public sector units, 83 had paid dividends. Of these, major contributions were from petroleum companies, followed by power and telecom firms.
For the revenue department, the change in norms will mess up a fairly smooth tax administration of dividend tax, besides reducing the buoyancy of direct tax collections. The department will now have to chase individual tax payers and obtain tax deduction at source certificates, instead of the present system of obtaining details from the disbursing companies.
Sources said such individual-based collections invariably raised the prospect of a larger tax slippage because of the problems in tracking taxpayers.