Saturday, January 9, 2016

What is a Dividend ?

  • A Dividend is a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves).
  • Dividends are nothing but a share on the post-tax profits of the company, i.e. profits remaining with the company after meeting out all its expenses and tax liability

What is a Dividend distribution tax ?

  • Dividend distribution tax is the tax levied by the Indian Government on companies according to the dividend paid to a company's investors.
  • At present, dividend is taxed in the hands of the company at a uniform rate.
  • The DDT is sprayed uniformly on corporate profits and finance ministers love it for the sheer simplicity through which it is collected. 
  • The DDT, instead of taxing dividends in the hands of the earner, is paid by companies or mutual funds on the gross amount of dividends paid out each year. 
  • The current dividend rate is 15 percent plus other cesses, but the actual effective rate is closer to 17 percent due to the way it now has to be calculated.

So problem kya hai ?

Many feel that the Dividend Distribution Tax Is A Favour To The Super-Rich and hence 'It Must Go'

There is a Discrepancy in how this DDT is applied over investors ...How ? below !

Consider this example. 
  • If I am a lower middle class investor with some money in mutual funds or even shares, my tax bracket is either zero or 10 percent. But the company deducts DDT (though I don’t know it) at nearly 16-and-odd percent (just under 17 percent). I am happy because the dividend that hits into my bank account is tax-free, though the fact is the tax has been pre-deducted by the company. I am indirectly paying more tax than what the law says I should at my income level.
  • On the other hand, consider the better off – those paying the 20 percent and 30 percent tax rate (more, including cesses). They pay just 17 percent, well below what they would have had to if there was no DDT. DDT swats the small taxpayer more than the big ‘uns.

But doing away with it is not a solution ....toh kya karna chahiye....Bring in RATIONALISATION ? (Ideas for Budget 2016-17)

  • Definitely it has to be modified in such a way that it in sync with the present times.The subsidisation of the super rich must stop.
  • Ending the subsidised lunch on DDT to rich promoters will be more than enough to finance OROP (one-rank-one-pension).
  • it would augur well to exempt DDT in all those cases where dividends paid are not more than (say) 40 percent of post-tax profits. 
  • DDT may be levied on those companies where dividends paid exceed this limit. 
  • This could be one possible way to ensure that companies don’t pay the bulk of their profits as dividends and at the same time is also able to satisfy the reasonable expectations of the investors without facing any cascading effects on the cost of dividends.

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