Mumbai: Large conglomerates that have dividend-paying subsidiaries are set to benefit from the proposal on changes in dividend distribution tax, with a parent company now able to set off taxes on any dividend received from subsidiaries against the tax payable on its own dividend distribution.
Still, an unchanged tax rate has left some industry watchers disappointed.
“The dividend distribution tax rate has been maintained at 15% against the street and our expectation of a possible reduction to 12.5%,” Gaurav Dua, head of research at Sharekhan Ltd, said.
The subsidiary dividend proposal in the 2008 Union Budget will remove the incidence of double taxation on dividend distribution in the hands of the parent company. Dividend distribution tax is levied at the rate of 15%.
Currently, a domestic company is liable to pay dividend distribution tax. As a result, the distributed dividend is sometimes taxed twice in the hands of a subsidiary company and its parent company.
The parent company will be able to set off the dividend received from its subsidiaries against dividend distributed by it, provided the dividend received has suffered the distribution tax and the parent company is not a subsidiary of another company. According to the provision, a company shall be considered a subsidiary of another company if the latter holds more than 50% in it.
The removal of double taxation, according to Deepak Parekh,?head?of?India’s?premier mortgage firm Housing Development Finance Corp. Ltd, will encourage corporate houses to opt for a holding company structure. The Reserve Bank of India has recently released a discussion paper on how a holding company can be structured in the financial sector.
Companies that stand to gain from the move include State Bank of India, which received about Rs590.23 crore in dividend from subsidiaries in fiscal 2007. The bank will, in effect, save nearly Rs90 crore in taxes each year if the rate of dividend is maintained.
SBI paid out Rs737 crore to its shareholders as dividend in fiscal 2007, and the Rs90 crore savings is likely to be passed on to its shareholders.
ICICI Bank Ltd received dividend of around Rs200 crore from its subsidiaries and joint ventures in fiscal 2007. The new proposal would save the bank some Rs30 crore in annual taxes at the current dividend rate.
Larsen and Toubro Ltd’s dividend from subsidiaries in fiscal 2007 stood at Rs41.71 crore, at the same rate of dividend the firm could save more than Rs6 crore in taxes each year.
Mahindra and Mahindra Ltd (M&M) would save some Rs17 crore on taxes. M&M had received nearly Rs115 crore in the form of dividend from its units.