India is considering changes to its dividend distribution tax, according to people with knowledge of the matter, in a bid to goad companies to boost spending and revive foreign fund inflows.
The budget statement due February may include a proposal to tax dividends once they are paid to shareholders, rather than the current system where the company pays the levy, the people said, asking not to be identified as the deliberations are private.
The move would be the latest in a series of steps from Prime Minister Narendra Modi's government to prop up growth from the lowest in six years. Over recent months, authorities have slashed corporate taxes, rolled back a levy on global funds, injected $10 billion into struggling state banks, and eased foreign investment rules to encourage companies to boost spending.
Why do this?
The impact of the dividend tax has been prompting firms to invest in debt "thereby depriving companies of much-needed equity," to expand, said Daksha Baxi, Mumbai-based head of international taxation at law firm Cyril Amarchand Mangaldas. For investors the tax meant they can't take credit "for taxes paid by Indian companies and secondly, their tax incidence goes up."
A spokesman for the finance ministry couldn't be immediately reached for comment. The move is among recommendations of a government-appointed panel, the Economic Times reported earlier.
Indian companies need to pay the tax office 15% of dividends declared, which rises past 20% once surcharges are added. Investors, who are also taxed on their earnings, have protested these multiple levies.
The dividend distribution tax brings about 600 billion rupees to the exchequer each year and the planned changes won't affect collections, the people said.
Share of gross fixed capital formation in India's GDP has been falling as companies have refrained from investing. The measure stood at 29.7% in the June quarter, hovering near the record low of 27.9%, according to data compiled by Bloomberg