Indian companies rush to declare interim dividends to beat budget changes
An increasing number of companies are rushing to pay dividends to shareholders before the end of fiscal 2016, after the budget introduced a 10% additional tax on individuals with dividend income over Rs.10 lakh.
Board meetings have been announced by 250 companies since 29 February and the agenda is to consider payment of an interim dividend, showed data compiled from Capitaline and stock exchange announcements as on Tuesday.
Companies considering interim dividends in the coming days include Coal India Ltd, Reliance Industries Ltd, Bharat Forge Ltd, Piramal Enterprises Ltd, Indiabulls Housing Finance Ltd, Bajaj Auto Ltd, Godrej Industries Ltd and Eicher Motors.
About 40 companies, including Oil and Natural Gas Corp (ONGC), Piramal Enterprises Ltd, The Phoenix Mills Ltd, Siyaram Silk Mills Ltd, and IRB Infrastructure Developers Ltd, will meet on Wednesday to approve divided payments. Reliance Industries' board will meet on 10 March.
Boards of more than 50 companies have already approved dividend payouts to shareholders and fixed record date, shows data collated from stock exchanges.
The rush to pay interim dividend, intended to beat the new tax introduced by the budget, comes as no surprise. A number of Indian firms still have high promoter holdings, which means that these promoters earn significant amounts through dividend payments.
Anish Thacker, tax partner at EY, says that a flurry of dividends have been declared in the past when the provisions for taxing dividend have been amended. For instance, just before the dividend distribution tax was reintroduced with effect from 1 June 2003, dividend payments had picked up, Thacker noted. "This practice is therefore quite common," he said.
Finance minister Arun Jaitley announced in the Union Budget that resident investors (individual as well as promoters) whose dividend income exceeds Rs.10 lakh during a fiscal will be subjected to a 10% levy. This levy is in addition to the 20.47% tax that Indian companies pay as dividend dis- tribution tax on dividends declared.
But there may be a catch. Companies will have to ensure that these dividends are credited on or before 31 March to beat the new tax, said consultants and lawyers. If payments are credited after 31 March, the additional tax will need to be paid, they say.
"Declaration and payment of dividend before March 31, 2016 is therefore a one-time opportunity for such companies to mitigate additional 10% tax liability for the individual promoters. However companies must fulfil dividend payments on or before 31 March to ensure mitigation of tax liability in the hands of the individual," said Pranay Bhatia, tax partner, BDO India LLP, an audit firm.
Bhatia said that a majority of the individuals follow cash-basis of accounting under which, revenue and expenses are recorded when cash is received or paid.
Sanjay Sanghvi, tax partner at Khaitan and Co, agreed with that view.
If a dividend paying company completes all legal formalities to declare dividend by 31 March and the corresponding legal right to receive such dividend accrues to the shareholder, in such case, this dividend may not attract the new additional tax, Sanghvi said.
Pranav Haldea, managing director, PRIME Database Group, said the new tax could lead to a drop in the dividend outgo of Indian companies from next fiscal, which may help companies retain cash on their balance sheet.
"While companies are rushing to pay dividend, it is a one-time opportunity to avoid tax liability. Going forward it may discourage companies to pay dividends and there is a possibility that companies will retain cash on its books. Alternatively, it may deposit money into banks to earn interest income," Haldea said.
One such instance was observed on Tuesday, when Century Plyboards (India) Ltd announced it was changing its dividend policy with a view to retain cash for ongoing capex projects. The company reduced the dividend band in the range of 10-15% of distributable profit after declaring 100% dividend on face value of Rs.1 per share.