NEW DELHI : Finance ministry officials on Monday rejected industry demand for changes in budget proposals relating to dividends being taxed in the hands of shareholders and to the cap on employer’s tax-free contribution to the retirement savings of high earning employees.

Industry executives told finance minister Nirmala Sitharaman, revenue secretary Ajay Bhushan Pandey and other officials at a meeting of the Federation of Industrial Chambers of Commerce and Industry (Ficci) that the taxation of dividends in the hands of the shareholder at the applicable personal income tax rate would increase the tax liability on such payouts. Industry executives also said that the 7.5 lakh combined ceiling for employers’ contribution to their workers’ new pension system (NPS) corpus, superannuation fund and provident fund would step up the tax outgo on high earning individuals. The tax liability of these individuals went up after Sitharaman’s previous budget when the surcharge on income was raised, giving it the name “super rich tax."

Revenue secretary Pandey said that the 7.5 lakh combined ceiling on employer’s contribution will apply to only those with an annual salary of more than 60 lakh.

Pandey said that the proposal was made after carefully studying the system in other countries including the defined-contribution pension system of the US, which also has limit on how much an employer can contribute tax free.

“In every country, there is such a limit," said Pandey. In the case of dividend being taxed in the hands of shareholders, Pandey said that in the existing system, tax on dividend worked out to 20.5% including surcharges while in the proposed system, dividend income is taxed as personal income at applicable slab, which was a fair system.

He also said that small shareholders who have taxable incomes of up to 5 lakh will not have to pay tax on dividend. Also, for those who sign up for the new low personal tax rate system without benefit of tax exemptions, the applicable tax is lower than 20.5% for income up to 10 lakh. The scheme announced in the budget proposes a tax rate of 10% for income in the range of 5-7.5 lakh and 15% for income in the range of 7.5-10 lakh. “There is another class of tax payers, the foreign investors. If dividend is not taxed as income, they are not able to get credit (for the tax paid by the company in India) in their home countries. If dividend is treated as income, as per tax treaty, they will get concessional tax rate of 5-15% for which they would get credit in their home country," said the revenue secretary.

Pandey also said that the best option is to tax dividend at the income tax rate applicable to the recipient. “Every income should be taxed at the applicable rate, other than the few exemptions we have made. So, nobody will have any grudge," said Pandey. Finance minister Nirmala Sitharaman, who was present on the occasion, said the government was giving technology a big role in tax administration and was monitoring the assessments made by officials.

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