The Union Budget 2016-17 has brought cheer to minority shareholders in a very unusual fashion. In just two days of the Budget, more than a dozen companies have announced dividends to their shareholders and more are likely to follow suit.
The move is to avoid the additional 10 per cent dividend distribution tax (DDT) announced in the Budget that comes into effect from April 1, 2016.
The tax will be levied on individuals, hindu undivided family (HUF) or a firm who is resident in India who earn annual dividends over Rs 10 lakh.
This levy is over and above 15 per cent DDT that is currently being paid by companies.
According to an analysis done by domestic brokerage Centrum, over a dozen companies, including Cadila Healthcare, Divi’s Laboratories, Godrej Industries and Mahindra Lifespace Developers have made dividend announcements in the past two days.
“The additional 10% tax will be applicable from April 1, 2016 which means that the dividends declared before March 31, 2016 will not be taxable. Those promoters who will be at the receiving end of this announcement are likely to encourage companies to declare higher dividends before March 31, 2016,” said Centrum Wealth Research in a note.
More companies are likely to announce dividends in days ahead, say market participants.
“The companies with high promoter shareholding will also prefer advancing dividend pay-out and may pay most of it before March 31, 2016 so that they do not end up paying 10 per cent tax on their dividend income. This could lead to a rise in dividend distribution in the next one month,” the note added.
Similar instances have been witnessed in the past whenever the government has tweaked the taxation structure on dividend payouts.