High tax takes sheen off generous MNC dividends | Economic Times

Mumbai: Since Chandrakant Sampat began buying into top MNCs five decades ago after they had begun to list locally, the rich and the astute in Mumbai followed the late value-investing pioneer to multiply their wealth, helping these stocks establish their credentials as all-weather wealth creators. But a change in dividend laws has dimmed their allure for India's HNIs — ironically at a time of record payouts.For investors in the highest tax bracket, the abolition of dividend distribution tax (DDT) has meant an effective tax incidence of 43 per cent.“MNCs huge dividends since last year April is a double whammy to investors as they will have to pay a higher tax on a larger dividend base with tax as much as 42.7 per cent on one hand while the capital gain is lower due to dividend adjustment,” said Ravi Sardana, an investment banker. “It’s better investors pay capital gain tax if companies moderate dividend payouts and allow stock price to appreciate.”But companies such as SKF India, Pfizer, Sanofi, Abbott, GSK Pharma, Timken India, and Oracle Financials have more than doubled their dividend pay-outs this year, mainly due to the abolition of DDT. 80107016The overseas parents of these companies will stand to benefit from the removal of the DDT as they can now claim credit at home for the corporate taxes paid in India, according to experts.Personal tax together with corporate tax make Indian dividend yields one of the lowest in the world for domestic investors while for non-resident investors, there is a clear advantage, according to experts.“In case of non-resident investors, there is a clear advantage as they will be able to resort to the provisions of a tax treaty, which may prescribe a lower rate subject to qualifying conditions being met,” said Sunil Badala, partner & head, financial services, Tax, KPMG in India. “For instance, the Mauritius Treaty prescribes a rate of 5 per cent if the shareholding is more than 10 per cent in the Indian company.”Pharma company Sanofi India paid Rs 106 per share dividend and a one-time special dividend of Rs 243 per share to the shareholders in June last year. Pharma major Pfizer paid a special dividend of Rs 320 per share or 3,200 per cent. Oracle Financial Services has paid a dividend of Rs 180 per share. SKF dividend payout ratio was 222 per cent compared to 18 per cent previous year.In a letter to the Central Board of Direct Taxes, the Association Of National Exchange Members of India (ANMI) demanded that dividend up to Rs 10,000 per company per recipient be made tax free in the hands of the recipient and dividend over and above the suggested ceiling be taxed as regular income. “This will ensure that smaller investors get the desired benefit and it will also encourage investing in more companies, deepening and broad basing our markets,” said the letter.The cumulative tax rate on dividend income is the highest in India as compared to other countries, followed by South Korea, the UK and the US, said ANMI. In Japan, capital losses on listed shares can be offset against dividend income.