Peeved over the cascading effect of dividend distribution tax (DDT) since most corporate houses have at least three-four subsidiaries, Ficci has urged the finance ministry to re-introduce section 80M in the Income Tax Act.
The re-introduction would help deduct the tax at single point by way of corporate tax and not at subsequent levels when the profit is distributed among shareholders.
In a letter to the finance ministry, Ficci has questioned the rational of rate increase from 12.5% to 15%, which would actually go up to 17%, with the inclusion of indirect corporate tax, surcharge and education cess. On top of this, the 17% tax is charged every time profits are shared with its subsidiaries, a Ficci official told FE.
For a company that has four vertical subsidiaries, the dividend at the bottom would eat away over 50% of the original dividend. Re-introduction of section 80M would mean that the deduction is done at single point while computing the total income of a company and not at every time it is being paid.
The income tax on dividend was exempted in 1997 on the ground that such taxation led to double taxation because a company paid tax on the income and when the income was distributed to the shareholders as dividend, it was subjected to tax again in the hands of the shareholders.
The framework of the dividend distribution tax as it exists today penalises the sharing of wealth by the holding company with its subsidiaries.