Taxing dividend a double jeopardy? :an analysis of the policy of dividend Taxation in India

Abstract

This paper examines whether taxing dividend Income amounts to double taxation and how different countries have handled this issue. It is also explained why companies prefer to pay dividend despite this tax disadvantage. India changed its policy of dividend taxation in the year 1997 by introducing Dividend Distribution Tax. The DDT, though has certain advantages, has increased the tax burden of the corporates. It is biased in favour of the wealthy taxpayers who fall under the highest tax bracket. In this context, this paper analyses how other countries have harmonised corporate and dividend taxation. Divergent approaches of various countries provide policy alternatives for India in the sphere of Dividend taxation. An attempt has been made in this paper to examine the pros and cons of a wide range of methods of dividend taxation followed by countries around the world and evaluate each of such policy alternative in terms of their performance against key policy goals, viz., Elimination of double taxation, Simplicity and administrative convenience, Efficiency in checking evasion, Size of tax revenue mobilisation and Equity (primarily vertical equity, in terms of the progressivity of the tax structure). A consequence table mapping the policy alternatives with the policy goals has been drawn and based on the analysis, it is suggested that India switches over from DDT to the policy of taxing dividend in the hands of the shareholders with a threshold deduction of Rs. 75000/-