CII calls for rationalising dividend distribution tax

CII calls for rationalising dividend distribution tax
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First Published: Fri, Mar 30 2007. 06 21 PM IST
Updated: Fri, Mar 30 2007. 06 21 PM IST
At a time when the country’s transmutation to a developed economy depends much on proper infrastructural build up, the dividend distribution tax (DDT) is proving to be a real hindrance to infrastucture projects. It is in this vein that the Confederation of Indian Industry has called for a complete overhaul of the DDT.
CII says DDT amounts to double taxation and, in some cases, multiple taxation. It says jurisdictions across the globe do not subject dividend to distribution tax or its equivalent but tax dividend income. They allow rebate or credit to the extent that dividend is distributed, said CII.
The confederation took up the matter after the Union Budget was announced. It wrote to the government about it, with special emphasis on the problem being faced by the country’s infrastructure developers on the incidence of multiple dividend distribution tax (DDT) under Section 115-O of the Income Tax Act at each layer of holding–subsidiary chain till it reaches the shareholders.
Under the current provision, a domestic company is liable to pay DDT at the rate of 17% on the amount of dividend distributed by it, in addition to the normal tax on profits.
This 17% is applicable at each stage when a subsidiary company declares and distributes dividend to the holding company and the parent in turn makes a payout to its shareholders, explained the CII release.
Currently, infrastructure projects are being executed through Special Purpose Vehicles (SPV) as mandated by the Centre. The normal practice is to have a separate SPV for each project a company is executing.
So a company that undertakes multiple projects in the areas of roads, airports, seaports, and power projects will be having a number of such SPVs, which are its subsidiaries.
Once this SPVs distributes dividend, it attracts DDT at 17% at the first stage and once again at the hands of the holding company when it distributes dividend to the shareholders, thus taxing same stream of dividend income twice.
According to CII this is against the principles of taxation. It is very much pertinent to note that the bid condition to have separate SPVs for each project is mandated by various arms of the Government. Otherwise, the holding companies can avoid this route by having separate units and reduce the incidence of DDT.
CII has therefore, asked for the reintroduction of the Section 80M of the Income Tax Act, which was withdrawn in 2003. Under the section, companies were entitled to tax credits on the dividend they received from their subsidiaries, if they themselves didtributed a portion of their profits to thier shareholders.
CII has said that DDT should be definitely eliminated for infrastructure companies and also the general principle of elimination should be applied to other sectors. However, if complete elimination is not possible for all sectors, then for other sectors it should be brought down to 5%, said the CII release.
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First Published: Fri, Mar 30 2007. 06 21 PM IST