Sinhas Approach On Dividend Tax Ad Hoc

Presenting the budget for 2002-2003, the finance minister announced that dividend income, at present exempt in the hands of the shareholders, would be taxable from the assessment year 2003-2004.

In paragraph 181 of the budget speech, the justification for this has been explained thus:

"Under the present system of taxation of dividends and income from units, the company or the mutual fund pays a 10 per cent tax, and the income is exempt in the hands of the recipient. Such a system not only taxes incomes 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 people in the high-income groups to be taxed at much lower rates than the rates applicable to them.

"These issues have been troubling me over the past four years, and I am now convinced that the existing system must go. I, therefore, propose to abolish the distribution tax of 10 per cent on companies and mutual funds on the dividends or income distributed by them.