Companies are rushing to pay dividends to shareholders before the end of 31 March after finance minister Arun Jaitley introduced a 10% additional tax on individuals with dividend income of over Rs.10 lakh in the budget for the year starting 1 April.
Board meetings have been announced by nearly 275 companies since 29 February to consider payment of interim dividend, according to data compiled from Capitaline and stock exchange announcements as on Wednesday.
Companies that are considering paying interim dividends to shareholders in the coming days include Coal India Ltd, Reliance Industries Ltd, Bharat Forge Ltd, Piramal Enterprises Ltd, Indiabulls Housing Finance Ltd, Bajaj Auto Ltd, Godrej Industries Ltd and Eicher Motors.
Reliance Industries’ board will meet on 10 March. Another 50 companies including Kirloskar Industries Ltd, Marico Ltd, Hero Motocorp Ltd, Shoppers Stop Ltd, and Dishman Pharmaceuticals and Chemicals Ltd will have their board meetings on Thursday to approve dividend payout, data showed.
Boards of more than 60 companies have already approved dividend payouts to shareholders and fixed record date, shows data collated from stock exchanges. This includes 38 companies that met on Wednesday. Names include Oil and Natural Gas Corp. (ONGC), Piramal Enterprises Ltd, The Phoenix Mills Ltd, Siyaram Silk Mills Ltd, and IRB Infrastructure Developers Ltd, and Torrent Pharmaceuticals Ltd.
The rush to pay interim dividend, intended to beat the new tax introduced by the budget, comes as no surprise. A number of Indian firms still have high promoter holdings, which means that these promoters earn significant amounts through dividend payments.
Anish Thacker, tax partner at EY, says that a flurry of dividends have been declared in the past when the provisions for taxing dividend have been amended. For instance, just before the dividend distribution tax was reintroduced with effect from 1 June 2003, dividend payments had picked up, Thacker noted. “This practice is therefore quite common,” he said.
Jaitley in the Union budget announced that resident investors (individual as well as promoters) whose dividend income exceeds Rs.10 lakh during a fiscal will be subjected to a 10% levy. This levy is in addition to the 20.47% tax that Indian companies pay as dividend distribution tax (DDT) on dividends declared.
In 1997, then finance minister Yashwant Sinha first introduced DDT at 10% on distributing dividends. This was removed in the Union budget of 2002, allowing dividends to be taxed in the hands of the recipients instead of companies. In the 2003 Union budget, the government re-introduced DDT with a higher rate of 12.5% which was later increased to 15% in the 2007 budget.
But there may be a catch. Companies will have to ensure that these dividends are credited on or before 31 March to beat the new tax, said consultants and lawyers. If payments are credited after 31 March, the additional tax will need to be paid, they say.
“Declaration and payment of dividend before 31 March 2016 is therefore a one-time opportunity for such companies to mitigate additional 10% tax liability for the individual promoters. However, companies must fulfil dividend payments on or before 31 March to ensure mitigation of tax liability in the hands of the individual,” said Pranay Bhatia, tax partner, BDO India LLP, a tax and advisory firm.
Bhatia said that a majority of the individuals follow cash-basis of accounting under which, revenue and expenses are recorded when cash is received or paid.
Sanjay Sanghvi, tax partner at Khaitan & Co., agreed with that view. There are two types of accounting methods practiced—cash system and mercantile (also known as accrual) system, and the taxability of dividend in the hands of a shareholder will depend upon the “method of accounting” regularly followed by him, Sanghvi explained.
“An individual shareholder, who follows ‘cash system of accounting’ receives dividend after 31 March 2016, then it will be taxed in his hands in next financial year upon its actual receipt and would therefore be subject to tax on this new additional 10% tax. On the other hand, a shareholder who follows mercantile/accrual basis of accounting, will be taxed on such dividend in this very financial year (Assessment Year 2016-17) if the dividend paying company completes all legal formalities to declare dividend by 31 March and corresponding legal right to receive such dividend accrues to the shareholder. In such a case, this dividend may not attract this new additional tax,” Sanghvi said.
Analysts said that more companies may rush to announce dividends, seek approvals, and fix record date before the 31 March closure.
A 29 February report by Angel Broking report reviewing the Budget said that most IT companies are cash rich and expected them to be prospective candidates for high dividend payouts.
Pranav Haldea, managing director, PRIME Database Group, said the new tax could lead to a drop in the dividend outgo of Indian companies from next fiscal, which may help companies retain cash on their balance sheet.
“While companies are rushing to pay dividend, it is a one-time opportunity to avoid tax liability. Going forward it may discourage companies to pay dividends and there is a possibility that companies will retain cash on its books. Alternatively, it may deposit money into banks to earn interest income,” Haldea said.
One such instance was observed on Tuesday, when Century Plyboards (India) Ltd announced it was changing its dividend policy with a view to retain cash for ongoing capex projects. The company reduced the dividend band in the range of 10-15% of distributable profit after declaring 100% dividend on face value of Rs.1 per share.