Union Budget 2018-19: Govt should withdraw dividend distribution tax
Rakesh Nangia January 23, 2018
Set to be presented on February 1, the Union Budget 2018 will surely be a challenging one for the government. With bold steps like demonetisation and introduction of GST, it is time again for the government to prove its potential in its final budget before the 2019 general polls.
Corporate bodies have started putting forward their expectations, the foremost being rationalisation of tax rates and withdrawal of surcharge and cess on Income Tax. The proposal of the Finance Minister, in the Budget of 2015-16, to reduce the tax rate from 30% to 25% in four years and reduction in the US tax rates are the reasons why the corporates are hoping for tax rate cut.
A domestic company, distributing dividend, is required to pay Dividend Distribution Tax (DDT) on the already taxed profit, at an effective rate as high as 20.36% after "grossing up" and investors in receipt of dividend above INR 10 Lakh are required to pay 10% income tax.
Even expenses incurred for earning the exempted dividend income are not allowable under section 14A read with Rule 8D and leads to litigation around this issue. Budget 2018 is expected to withdraw DDT and tax dividend income in the hands of the recipient shareholders.
Further, credit of DDT is only available to a recipient company holding 51% or more of the share capital of the company declaring and distributing dividend. Thus, an absolute removal of cascading effect of DDT is sought, providing for DDT credit without any conditions/ restrictions.
Along the same lines, clarification on carry forward of excess foreign tax credit is sought.
The Income Tax Act allows for set off in respect of foreign taxes paid on income earned abroad. However, no set off is allowed in case of loss.
Stringent laws and cumbersome procedures defeat the government's objective of "housing for all by 2022. For instance, a provision in the law requires taxing notional income of unsold properties, held as stock-in-trade by real estate developers. This amendment was brought about as a means to promote the real estate sector, it however has had serious impacts on the real estate developers who have been unable to sell their properties in the sluggish market.
In view of the genuine hardship faced by real estate developers, the government could either consider withdrawing the amendment or increasing the exempt period of one year. Our tax laws need to keep pace with the growing economy. In an economy that is dominated by the service sector, carry forward of losses only in case of amalgamation of companies that own 'industrial undertakings' is pointlessly restrictive.
Moreover, the CBDT is yet to notify the transition provisions relating to POEM. Undertaking a process before the law itself is brought into force causes undue hardship. The taxpayers must therefore be given some time to put together their affairs to comply with POEM Guidelines. It is thus desired, in the light of the above that the applicability of POEM be deferred.
India has emerged as a strong yet liberal nation with clear signs of growth. However, post demonetization and reforms like the Goods and Services tax, it remains to be seen what the government will do to recover from the jitters.