The government may consider effectively halving the tax rate on dividend income for individuals in the highest tax bracket, two people familiar with the development said, likely boosting stocks that are facing a rout globally.

The government is looking to tweak the current regulations to bring down the tax on dividends to about 20% from up to 43% for Indian individual investors. The government may offer the concession by offering a flat 20% tax on dividend income.

After a change in the budget, dividend income is now taxable up to 43% in the hands of the recipient from April this year.

Foreign companies, on the other hand, would have to pay anywhere around 5% to 15% tax on dividends depending on the tax treaty that India has with the country from where the investment is routed.

The government has reached out to some of the senior revenue officials, prominent mutual funds, tax advisors and lawyers to take their suggestions. Several investor associations and even some prominent investors had asked the government to change this anomaly that favoured foreign investors over their Indian counterparts.

“There is a difference of 22% between tax on dividends paid by a foreign company and by an Indian promoter and this has led to a situation where domestic companies are rushing to pay dividends before April. Bringing parity between tax on dividend paid by Indian companies and foreign companies is a good move and will bring in ease of doing business,” said Girish Vanvari, founder, tax advisory Transaction Square.

The government removed the dividend distribution tax (DDT) and made it taxable at the hands of investors. Earlier, DDT was 20% in the hands of the company, which meant that this was a pure cost. After the change, this would mean that a recipient of dividend will have to pay tax as per their respective tax slabs; and the highest bracket results in 43% tax outgo. Tax experts say the government can bring in a flat tax rate that would help local investors.

“Tax rates on dividends for individuals are very high because the base tax rate is 30% and after including the surcharge and cess, the effective rate goes as high as 43%. If there is a flat rate at which dividends are taxed, then Indian investors could get some level playing field,” said Rajesh H Gandhi, partner, Deloitte India.

“Even as the government removed DDT and made it more like TDS, several foreign companies that invest through other countries may end up paying taxes as low as 5%.The tax rate for individuals in India and even FPIs registered as trusts continues to be substantially high and this is creating a lot of unease among investors,” said Amit Singhania, partner, Shardul Amarchand Mangaldas.

Under tax treaties with countries such as Mauritius and Singapore, the tax rate would be 15%, while for the US and Canada, the tax rate applicable on dividends would be 25%. For other countries, the tax would be at 10%, but the MFN status would allow an additional 5% setoff.

Source : Times of India