The government will not reduce the dividend distribution tax to 10 per cent from 12.5 per cent.
In the Union Budget for 2003-2004, Finance Minister Jaswant Singh had shifted the tax incidence on dividend declared by companies from shareholders to companies and had increased the levy to 12.5 per cent.
According to the revenue department, the 12.5 per cent dividend distribution tax would yield Rs 2,000 crore (Rs 20 billion) to the exchequer in the next fiscal year.
"Of this, the increase in tax incidence by 2.5 percentage points alone is expected to net Rs 400 crore (Rs 4 billion)," a senior revenue official said.
In several post-Budget interactions, Jaswant Singh said the finance ministry would review the higher dividend distribution tax.
He had, however, ruled out any relaxation if war broke out in Iraq. With the United States and Iraq heading for a war, finance ministry officials said India Inc should not expect any change in the tax rate.
Officials said that chambers of industry had raised two major issues in their post-Budget memoranda to the finance ministry. First, why increase the rate to 12.5 per cent when corporate profits are already taxed.
The second issue was the cascading tax affect on companies when dividend is distributed by one group company to another and then again passed on to shareholders.
Revenue department officials pointed out that the dividend distribution tax in India was as high as 20 per cent some time back.
"The dividend distribution tax was fixed at 12.5 per cent keeping in mind revenue considerations," said an official.
It should not be forgotten that companies stand to benefit too because the Budget halved the corporate tax surcharge to 2.5 per cent from 5 per cent.
Government officials also say that the argument about the cascading affect on companies too does not hold much water.
"The payment I make to a doctor, for instance, has already suffered taxes at the marginal rate of tax, depending on my annual income. Should it then mean that the doctor should be spared from income tax on the payment he receives," an official asked.
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