Investment World
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Taxation
Tax on dividends: Ouch!
Anup Menon
THE proposal to tax dividends in the hands of the shareholder as against the company seems to have evoked a negative response in the market. Predictably so.
Given that a large proportion of shareholders fall in the highest tax bracket of 30 per cent, they will now have to shell out an additional 20 per cent of their income from investments as tax. Shareholders who fall in the lowest tax bracket are unlikely to be affected as the rate of tax would still be 10 per cent. Therefore, investing for capturing dividends alone may not be a very profitable strategy.
As for the Government, the shift in the tax incidence may fetch more than the previous scheme. Further, the companies are also likely to benefit since the additional tax savings, on account of the removal of dividend tax, will accrue to them. If they decide to pass on the benefits to the shareholders, there will be no impact from the company's perspective. But it remains to be seen what they will actually do. The table shows some big companies that may see sizeable savings on account of the scrapping of the dividend tax. But this is unlikely to add value to shareholders at the aggregate level since they would have to cough up more for dividend tax directly.
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