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Cash flow planning in the new dividend tax regime
March, 07th 2007

Companies have gone into overdrive mode to line up resources for interim dividend after the Budget 2007 proposed an increase in the rate of DDT (dividend distribution tax) from the existing rate of 12.5 per cent to 15 per cent. "This is a reflex action," says Mr Anil Talreja, Senior Manager, Deloitte Haskins & Sells, Mumbai. Considering that the effective rate of DDT would be close to 17 per cent, after considering surcharge and education cess, there is certainly going to be a shower of dividends being distributed by Indian companies before April 1, 2007, he foresees.

"The proposed increase has been made effective April 1. Thus, all dividends declared, distributed or paid after April 1, 2007 will suffer the higher rate of tax. This will certainly result in an increase in the dividends being paid by the companies till March 31, 2007 i.e. prior to the date when the law is proposed to be amended," says Mr Talreja, in an interaction with Business Line.

"Companies need to ensure compliance with the requirements under the SEBI regulations including those in the listing agreement, which pertain to the minimum timeframe required to be adhered by companies for declaration, distribution and payment of the di vidends," he adds.

Tax on distributed income in respect of money market mutual fund and liquid fund is proposed to be increased to 25 per cent (plus surcharge and cess as applicable).

Is there anything to be read between the lines? "Yes," says Mr Talreja. "With the proposed amendment, Indian companies and specified funds will endeavour to ensure that dividends are not only declared but also paid before this date (April 1, 2007) to avo id any litigation with the tax authorities."

And here is something interesting that Mr Talreja draws attention to: "Considering the fact that the above proposed amendment is effective April 1, 2007, companies declaring and paying dividends after April 1, 2007 but before the date of passing of the F inance Bill, 2007 would be required to pay DDT at 12.5 per cent (plus surcharge and education cess as applicable). Thereafter, the differential tax would be payable once the Finance Bill, 2007 is enacted." A point with cash-flow implications, that is.

D. Murali

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