February 20, 2005
Thousand-Wise, Billion-Foolish ?
By Mukesh Jhangiani
United News of India
New Delhi (UNI) – Authorities preparing India’s 2005 Budget have been urged to stop exempting dividends Indian and foreign promoters earn– to the tune of thousands of crores of rupees.
Virtually unnoticed by millions of toiling Indian taxpayers, hundreds– perhaps thousands– of promoters have netted thousands of crores of rupees free of tax over the past eight years.
Critics say in an economy which suffers from managerial and resource inadequacy and does not ensure citizens’ access to water, housing, jobs, an effective system of justice and other basics, such policies smack of a class bias.
On one hand, authorities tax wage earners and even productivity awards, and have cut provident fund interest.
On the other, lakhs of crores are sunk in non-performing assets– loans the rich haven’t repaid– and thousands of crores fly out as company reserves distributed to individuals are exempted.
According to a news report this week, some multinationals running operations in India have declared huge dividend payouts– windfalls for bulk shareholders abroad.
The joyride started in February 1997 with then Congress Finance Minister P Chidambaram abolishing dividend tax on recipients as part of what the market hailed as a ”dream budget.”
In fact, says one critic, this was the prospect that brought the cheer and the accolades.
Since then, governments– National Democratic Alliance as well as United Progressive Alliance– have– with one exception– exempted recipients, encouraging companies to declare higher dividends– or tax-free cash year after year.
One e-published source claims the average dividend payout from Indian companies moved up from 20 per cent to 25 per cent in financial year 2004.
According to India Infoline, a hundred companies paid Rs 4,334.18 crore dividends for 2003-04– up 54.1 per cent over the Rs 2,811.3 crore paid in the previous year.
Advocates of dividend tax exemption claim it eliminates double taxation of profits– in the hands of the company and again in the hands of shareholders.
But opponents say taxing dividends declared by companies is not the same as taxing recipients’ dividend income.
A 19th century United States court ruling held that ”the capital stock of a corporation, and the shares into which such stock may be divided and held by individual shareholders, are two distinct pieces of property.
”The capital stock and the shares of stock in the hands of the shareholders may both be taxed, and it is not double taxation,” US Judge Rufus Peckham declared in 1896 in Bank of Commerce v State of Tennessee.
Asked to comment, a top Indian economist, speaking on condition of anonymity, said, ”There is no valid argument against taxing dividend or to favour exemption, especially considering that even wage earners who take home far less, are taxed.”
Yet, through that single exemption, critics say, the NDA and the UPA governments between them have contributed to thousands of crores of rupees of revenue shortfall over the years.
One man who tried to end that spree was NDA Finance Minister Yashwant Sinha who allowed exemption in February 2001– but abolished it a year later.
In that budget speech– his last– Sinha confessed he was troubled by the ”inherent inequity” in the system which ”must go.”
The inequity: ”Income is exempt in the hands of the recipient” and ”allows persons in the high-income groups to be taxed at much lower rates than the rates applicable to them.”
Sinha said, ”these issues have been troubling me over the past four years, and I am now convinced that the existing system must go.” He moved to abolish tax on dividends distributed by companies and levy it on ”such income… in the hands of the recipients.”
”Few are aware,” Sinha remarked in a newspaper interview in July 2002, ”that there are people in this country who have been earning anything between Rs 10 to Rs 20 crore by way of dividends. They have been earning in crores without having to pay any tax. You think it is unjustified to tax them?” he countered.
His previous Budget, Sinha went on, registered a revenue shortfall of Rs 40,000 crore, of which ”something like Rs 22,000 crore could be directly ascribed to concessions.”
Sinha’s public remarks notwithstanding, such qualms did not appear to weigh with either his NDA successor, Jaswant Singh, or UPA incumbent Chidambaram.
In a telephone interview this week, Sinha told UNI he believed that ”all income should be treated alike from the point of view of tax.”
He said ”the hue and cry that followed the 2002 budget was largely on account of the fact that I re-introduced tax on the dividend. Many opinion makers invest in stocks and resented the tax.”
But the exemption was reintroduced in 2003 on expert advice supplied by a group led by Dr Vijay Kelkar, an economist and former International Monetary Fund executive director.
The group recommended exempting dividend both in the hands of shareholders as well as companies distributing it.
Singh was petitioned by the Legal Cell of All India Tax Payers’ Association which spelt out the incongruity in taxing everyone– even agriculturists– but exempting dividends to promoters.
The Association warned that letting huge tax free sums accumulate in the hands of industrialists would increase the gap between rich and poor– violating Article 14 and the spirit of Article 39 (b) and (c) of the Constitution.
Those Articles provide for equality before law and forbid pursuit of economic policies that result in concentration of wealth to common detriment.
The Association said the move for full fledged exemption had not even found takers in the US.
Last week, the petitioners again represented to the authorities, urging withdrawal of exemption of tax on dividends in recipients’ hands, saying it amounts to discrimination between a common taxpayer and industrialists.
The Association says the dividends declared by companies end up in the pocket of the private management controlling the majority of shares, adding to individual incomes.
It says ten or twelve per cent tax companies must pay to declare dividend is not much price for promoters to transfer company reserves to individual accounts.
Individuals in control of companies can thus help themselves to more and more tax free income– increasing the gap between rich and poor and possibly undermining companies and jobs, it says.
UNI MJ RA GR1013
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