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Companies scramble to pay dividend to dodge date with higher tax
September, 25th 2014

Many companies are rushing to pay dividend to shareholders before October 1 when a higher dividend distribution tax (DDT) becomes applicable.

The boards of 118 listed companies have declared dividend since July 10 against 67 companies in the year-ago period. From October 1, the effective DDT rate will be 20.47% — an additional liability of 3.475%.

"Many listed companies and promoters of privately-held companies are taking advantage of the lower tax rate by distributing dividend before September 30," said Avinash Gupta, managing director, Alpen Capital, an investment bank.

Nearly 36 companies have announced final dividend since July 1 while 77 companies have declared interim dividend. TCS, HCL Technologies, Sonata Software, Care Ratings and Mahindra Lifespace Developers are among companies which have declared special dividend.

"This is understandable as the extra liability is quite big," said Kush Katakia, CEO, Beanstalk Advisory. At present, the effective tax rate after levy of surcharge and education cess is 16.995% (15% tax + 10% surcharge + 3% education cess) and the tax is paid by the company before the distribution of dividend paid. The rate was raised by the Modi government in the July Budget.

Companies scramble to pay dividend to dodge date with higher tax

"It make sense for corporates and mutual funds to declare and pay dividend for the financial year 2013-14, including interim dividend of financial year 2014-15, if any, before 1st October, 2014 so as to save tax of 3.475%," said Rajat Aggarwal, partner, RRA Consultants. TCS, India's largest company in terms of market capitalisation, which declared 500% interim and 4000% special dividend in July saved nearly Rs 326 crore in the form of lower DDT outgo.

Similarly, Indiabulls Housing Finance has announced 400% and 450% interim dividend successively in August and September. Care Ratings declared 60% interim dividend on July 31 and 650% special dividend on September 31.

Interestingly, Oracle Financial Services, which declared a dividend of 9,700% (Rs 485 per share) early September, had moved SAT challenging capital market regulator Sebi's ruling that there should be a gap of 30 days between book closure and record date for dividend declaration.

On Tuesday, SAT set aside the Sebi order, allowing the software company to declare interim dividend and fix the record date on September 25. Oracle would save about Rs 142 crore, thanks to the SAT order.

"Effective 1st October, DDT is to be charged on the gross amount and not the net dividend distributed. Hence, DDT shall be calculated on also an amount of divided which is actually never distributed," said Kunal Gandhi, partner, US Gandhi & Co, Chartered Accountants.

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