Abolish DDT to avoid double taxation

Given the faltering economic growth, I believe attempting to peg fiscal deficit at 5% of GDP in 2013-14 would be more realistic as against 4.8% target. The FM will have to deploy a judicious mix of measures to cut expenditure and enhance revenues.

He will neither have room for flagrant populism, given the unfavourable fiscal condition, nor for radical policy shifts, given the political compulsions ahead of the 2014 elections. Nevertheless, I believe the FM will choose to tilt towards the latter and take decisive steps to turn the economy around and create a more investment-friendly climate. Having woken up from its policy stupor, the government has already announced a slew of reforms and I expect the FM to continue treading the same path.

Given the fall in tax collections during the first nine months of 2012-13, one can expect that the FM would try and increase revenue collections by raising excise duty and service tax from 12% to 14%. The other sources of increasing tax collections increasing taxes on cigarettes and alcoholic beverages to improve human and fiscal health or increasing import duty on crude oil from 0% to 5%. 

Currently, Indian companies pay tax not only on their earnings but also on the dividends they pay to their shareholders. I fail to see the logic behind this. Yes, a company should pay income tax on the profits that it earns. But why subject it to dividend distribution tax (DDT)?

My view, however, is when a company pays dividends, it is merely distributing its current or historical earnings to its shareholders. Since these earnings have already been subjected to income tax, I believe there is no case for taxing them again in the hands of the shareholders.

Abolishing DDT would put an end to the prevalent double taxation, remove the bias against distributed profits and help ensure that shareholders get a fair return on their equity holdings. It would also encourage many companies to distribute higher dividend encouraging the retail equity cult. Foreign investors, who see DDT as a disincentive for investing in Indian equities, would be encouraged. In sum, not only would it correct an anomaly, it would also go a long way in reviving overall market sentiment.

Also, to really boost investor confidence in India, the FM needs to immediately drop the retrospective amendments to taxation laws that his predecessor made. Only then will India receive its fair share of global investments.

On the personal taxation front, the marginal rate of tax for the ‘super rich’ could go up to 40%. Inheritance tax and wealth tax could be introduced. However, in light of the hardships caused due to inflation, some tax concessions/benefits are likely for the masses.

Deduction under Section 80C may be revised to Rs150,000 from the existing limit of Rs100,000 to provide enhanced options of investment. There could also be some concessions given to interest on bank deposits to encourage savings. The limit of deduction on interest paid against self-occupied property may be revised up to Rs350,000. The Rajiv Gandhi Equity Savings Scheme could be made more attractive and extended to old/experienced investors as well.

To create a more investment-friendly climate from the capital markets perspective, the most important step relates to securities transaction tax (STT) – I would expect some rationalisation, if not complete withdrawal. This would help buoy the languishing volumes on the Indian bourses.

The writer is CMD, Motilal Oswal Financial Services Ltd