What is the impact of tax on dividend on the earnings of holding companies?

Investing Strategies
1

Hi,

In the union budget 2016-17, a 10% tax was announced on any entity (individual, HUF or firm) that get 10 lakh or more as dividend per year. Since the main (or only) income of a holding company and mostly it will be more than 10 lakh per year, I think this announcement has taken away 10% of the earnings of holding companies in one shot. However, I couldn’t see a 10% drop in share prices of the companies. Can someone please explain the rationale for the price not dropping?

Thanks,
Arun

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2

does Sec 115(O ) apply on this new 10% ?

3

Hi

As far as i can understand, the said regulation is not applicable on an assessee who is a company .
So the prevailing tax treatment on dividend received by a holding companies should continue.

This is a prima-facie interpretation from the budget doc, you may re-check with a domain expert for the fineprint.

Best

4

From:

(Re-arrangement of content mine)

The additional 10% tax on dividend income announced in the Budget would not pinch many wealthy promoter groups after all. Promoters of several blue chips hold only a small stake in their individual capacity, through HUFs (Hindu undivided families) and partnership firms controlled by them, which come under the new tax. Trusts and holding companies would not attract the proposed additional tax on dividend,

The rule is, however, open for interpretation and could result in litigation, tax experts said. For instance, courts had ruled in the past that taxes can be imposed on individuals in trusts where the share of the beneficiaries is fixed, experts said.

  • 17.39% of promoter stake in IT major Wipro is owned by the Azim Premji trust.
  • About 43% of promoter holding in Adani Ports and Special Economic Zone is also held in a family trust.
  • An employee welfare fund and trusts own 14.17% in automobiles major Mahindra & Mahindra (M&M).This is more than half of the promoter holding in M&M.
  • Tata Sons, which is the holding company of most listed companies in the Tata Group, would be exempt from the new tax on dividend.
  • The promoter holding in Reliance Industries is held mostly through limited liability partnerships (LLPs), which experts said would attract the new 10% levy. Reliance’s Petroleum Trust holds 3.84% in the company, which would be exempt from tax.
5

I really fail to understand the rationale of exempting trusts from this tax when many promoters own/control stake in their companies through these so called trusts. Is there a historic reason for this, I mean in law governing trusts etc?

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