In­dian com­pa­nies rush to de­clare in­terim div­i­dends to beat bud­get changes

The Pak Banker - - 6BUSINESS -

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.

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