BUDGET WATCH: DIVIDEND TAX RATE MAY COME DOWN TO 12.5%

The Union budget may reduce the dividend distribution tax (DDT) rate from 15% to 12.5%. In the last budget, Union finance minister P Chidambaram had hiked the rate, citing “vertical equity.” A reduction may encourage corporates to share wealth with their investors through issue of dividends and cheer the stock market. Mr Chidambaram had raised the DDT 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, while presenting the proposal in Budget 2007-08. Last year’s DDT hike did not bring in significant revenues. Besides, a higher rate discouraged companies from issuing dividends. The two factors may have led the government to do a rethink. A reduction in DDT rate will not impact tax collections much, though it can have a positive impact on the overall sentiment. However, sources said that a decision is still “very much open.” Though India’s corporate tax rate is 30%, the effective rate is around 19.26% due to several concessions. Still, there is pressure on the government to give some relief, taking advantage of the cushion available due to the boom in revenue collections. However, the finance ministry may take a holistic view and retain corporate surcharge at current levels if DDT is cut. A final decision would be taken at the highest political level. Since this is the last budget of the UPA government, the attempt is to give something for everyone, including the industry. The government may also announce steps to mitigate the impact of the impending slowdown in the US. – www.economictimes.indiatimes.com