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Impact of Tax Consideration on the dividend decision of a company

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Impact of Tax Consideration on the dividend decision of a company

In this article we are going to discus, the Impact of Tax Consideration on the dividend decision of a company. Impact of Tax Consideration on dividend decision before and after introduction of Dividend Tax. Here, we also discuss the meaning of Dividend.

What is a Dividend?

Generally, Dividend is a portion of profit after tax. Which is distributed among the owner and shareholder. The profit which is not distributed is known as retained earnings.

Mainly, the dividend policy of the company should aim at achieving the objective of the company to maximize shareholder’s wealth.

Tax consideration has the following impacts on the dividend decision of the company.

Before Introduction of Dividend Tax

Earlier, the dividend was taxable in the hands of investor. In this case, shareholders of the company are corporates or individuals. They are in higher tax slab.

So, it is preferable to distribute lower dividend or no dividend. Because dividend will be taxable in the hands of the shareholder. It should be tax @ 30% plus surcharges. While long term capital gain is taxable @10%.

On the other hands, if most of the shareholders are the people who are in no tax slab. Then it is preferable to distribute more dividend.

We can conclude that before distributing dividend, company should look at the shareholder pattern.

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After Introduction of Dividend Tax

Dividend tax is payable @12.5%-surcharge + education cess, which is effectively near to 14%. Now, if the company were to distribute dividend, shareholder will indirectly bear a tax burden of 14% on their income.

On the other hands, if the company were to provide return to shareholder in the form of appreciation in market price. By way of bonus share. In that case, shareholder will have a reduced tax burden.

For securities on which STT is payable, Short term capital gain is taxable @10%while long term capital gain is totally exempt from tax.

Therefore, we can conclude that, if the company pays more and more dividend then to get same after tax return. shareholders will expect more before tax return and this will result in lower market price per share.

Thank you for reading my article!!

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