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The second coming of the Telecom Regulatory Authority - Views on News from Equitymaster
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  • Mar 16, 2000

    The second coming of the Telecom Regulatory Authority

    The finance ministerís proposal to raise revenue by hiking the rate of dividend tax (payable by the company) from 10% to 20% is almost surely to disappoint in view of companies announcing interim dividend to get around the new measure. The higher rate is applicable post June 1 2000.

    First, the issue of dividend taxes. The government's decision to opt for a dividend tax rather than taxing dividend as income in the hand of the assessee is a logical step especially in view of the low levels of tax compliance in the country. Imposition of such a tax insures that the government gets its cut of the dividend payout in a lump sum from the corporate, rather than having to collect it from each recipient of the dividend.

    The more important issue pertains to the rate of taxation. The government now proposes to tax dividend at 20% as against 10% currently. The move will have drastic consequences. Companies would either cut down on their dividend outgo or limit growth to ensure that dividends (including the tax component) do not eat into cash flows that may be required for other operations (including investments). This move will specifically hit the high dividend paying companies like Hindustan Lever Limited, which pays over 66% of annual profits as dividends. Just to put the view in numbers, if HLL was taxed @20% for the existing year, its dividend tax liability would have been Rs 1.27 bn as against Rs 630 m under existing tax guidelines. Not to mention that the additional tax outgo will have the effect of increasing the effective tax rate of the company.

    In a move that will defer the effects of the tax, companies in increasing numbers are opting to declare interim dividends before the deadline. According to a newspaper report, the number of companies that will declare interim dividends is expected to touch 100. However, in coming years companies would not be able to dodge the tax.

    The government's decision to hike the dividend tax rate will have an adverse effect on companies (lower retained earnings) and investors (as dividend received may stagnate of even decline). The government on the other hand stands to realise little from such a tax. And even if the amount received is significant, it is not assured that it will be well spent (it will probably be used to support the burgeoning non-developmental administrative expenditure). On the contrary these funds could have been used for investments (by corporate) or consumption (by recipients). Under both circumstances, economic growth and sentiment would have been boosted.



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