15% RATE HASN’T LED TO HIGHER REVENUES WHILE DISCOURAGING INCOME DISTRIBUTION
A QUEER proposal involving a rejig in dividend distribution tax (DDT) is doing the rounds in the finance ministry. Though the government had raised DDT rates in the last Budget to 15% from 12.5%, the proposal is one of the options being looked at by the government to give some relief to India Inc. A minor tinkering in the DDT rate would not have a drastic impact on the tax collections, but would have a positive impact on the overall sentiment.
Although, the proposal to revert to the earlier rate looks queer, given that the finance minister had talked about vertical equity last year, sources in the government said a decision on this is still ‘very much open’. The proposal is among one of the options being looked at by the government to give some relief to India Inc, a source said. A possible reduction in DDT rates is plausible also because the increased rates has also not led to a significant hike in revenues on this account. More, a higher rate of DDT discourages companies from distributing their wealth among their investors.
Though, the effective rate of corporate tax is much lower at about 19.26% than the statutory rate of 30%, there is pressure on the government to give some relief to the corporate world using the cushion available due to boom in revenue collections. Giving relief on this count would encourage corporates to share wealth with their investors and thereby bring some cheer in the stock market as well.
However, the finance ministry is expected to take a wholistic view and a reduction in DDT rates may come only if the surcharge is left untouched. A final decision on the proposal would be taken at the highest political level. Since, this is the last full budget of the UPA government, the effort is on to give something to all sections of the society including the industry. The government wants to unveil some measures in the budget that would also mitigate the impact of the slowdown in the developed economies like the US.
Finance minister P Chidambaram had raised the DDT rate in the last Budget. “I believe that my tax proposals have brought about more horizontal equity. It is also necessary to improve vertical equity. Having regard to the capacity to pay, I propose to raise the rate of dividend distribution tax from 12.5% to 15% on dividends distributed by companies”, he had said presenting the proposal in Budget 2007.