Govt to review pros, cons of taxing dividends

New Delhi: The finance ministry has initiated an exercise for examining the pros and cons of taxing dividends at the hands of shareholders.

"The Central Board of Direct Taxes (CBDT) is looking at the entire issue from a conceptual point of view. The objective is to assess whether the present policy is more equitious than the earlier system of taxing dividends at the hands of the company," says a senior official.

While the issue of tax treatment of dividends is being revisited again, any change may have to wait till the next budget. CBDT has been flooded with a host of representations lately saying that the existing system of dividend taxation amounts to double taxation that is, companies are first required to pay tax on their profits and dividends distributed by companies, in turn, are taxed at the hands of the shareholders. This issue was also reportedly flagged by none other than Finance Minister Jaswant Singh, shortly after he assumed office.

"The argument that interest income is taxed only once as opposed to dividend income, which is subject to tax twice, is an age-old one. The contrary view is that the company and the shareholder are two distinct entities and therefore there is really no rationale for exempting the shareholder from paying tax on dividend income," says the official.

The move was intended to shore up revenues from promoters especially those holding high equity stakes in their companies who are said to have taken advantage of the lower tax rate and rewarded themselves by announcing hefty dividends.