10% distribution tax scrapped

Recipients' tax to be deducted at source

Under the present system of taxation of dividends and income from units, the company or the mutual fund pays a 10% tax, and the income is exempt in the hands of the recipient. Such a system not only taxes income in the hands of a person to whom it does not belong; it also militates against the pass-through status which is the very essence of a mutual fund.

There is also an inherent inequity in the present system, which allows persons in the high-income groups to be taxed at much lower rates than the rates applicable to them.

These issues had been troubling Union Finance Minister Yashwant Sinha over the past four years. He is now convinced that the existing system must go. Therefore, in Union Budget 2002-03, presented to parliament today, he has proposed to abolish the distribution tax of 10% on companies and mutual funds on the dividends or income distributed by them. Such income will, henceforth, be taxed in the hands of the recipients at the rates applicable to them, and will be subject to tax deduction at source at the rate of 10%. In order to avoid a cascading effect, companies receiving such income will be entitled to claim a deduction for the amount in turn distributed by them as dividends.

To continue the support given by past budgets to equity oriented funds of the UTI and other mutual funds, the income received during the financial year 2002-2003 by unit holders of such funds will be taxed only at 10% as at present.

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