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Q. Need of reforms in dividend tax: Discuss the need to bring reforms in the dividend taxation process.
Dec 31, 2016 Related to : GS Paper-3

Ans :

Introduction-

A dividend tax is the tax imposed by a tax authority on dividends received by shareholders (stockholders) of a company. It is tax on earning received on their investment in a company. Taxation on dividends is very complicated and inequitable. Since long there is demand that dividend should be taxed in the hands of investor (instead of company and investor both) at the rate applicable to investor’s income bracket.

Why there is need of reforms-

  • At present, companies pay a dividend distribution tax at the rate of 15% and Individuals who receive dividend income in excess of 10 lakh pay a dividend tax of 10%. So dividends bear a tax of 25% at most.
  • This is not an equitable way of taxing people. Company promoters who get the bulk of their income as dividends pay a lower proportion of their income as tax (maximum 25%) as compared to employees who receive the bulk of their income as salaries taxable at the highest marginal rate (at 30% above 10lakh). 
  • Hence taxing dividends in the hands of the shareholder, based on their total income would both be fairer and more revenue-efficient than the current arrangement.
  • Similarly to ensure that dividend income does not go under-reported, companies can be mandated to deduct tax at source at the highest marginal rate of 30%.
  • It leaves it to individuals whose incomes warrant a lower rate of tax to claim a refund while filing returns. Hence the government has to make the processing of claims and refunds fast and efficient, so that investor does not meet any unnecessary harassment. 

Conclusion-

Taxation on incomes receives via dividend is one of the most complicated and inequitable method in India, and the most needed reforms in it is overdue since long time. Hence to establish equity and to avoid unnecessary procedure government should bring above discussed reforms in dividend taxation. 


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