NATIONAL news reports said that the government has announced that a number of listed companies in the bourse that issue better dividends will not get benefits from the corporate tax cut offered in the national budget for 2015-16. This is due to the government’s offer of 10 percent tax rebate for the companies which pay dividends above 30 percent.
The new move has become controversial because many believe that a slight rise in corporate tax or withdrawal of some other benefits is highly sensitive to slow down investment which may in turn slow down economic growth. If the economy grows slow, the government revenue earning would rather fall from a rise in corporate tax. Experts suggest a careful weighing of the overall impacts instead of short term calculation of benefits.
The report said around 45 heavyweight companies gave dividends above 30 percent for 2013 and that the government (in the budget for the FY16) reduced tax rates for the listed companies to 25 percent from the earlier 27.50 percent. Due to the scrapping of the tax incentive, the listed companies which issue higher dividends have to pay 0.25 percent more in taxes compared with the taxes they paid last year, according to the report.
Market experts feel that the government might have taken the step in a bid to increase its tax collection and from the belief that the 10 per cent tax rebate was one kind of stimulus for the listed entities to offer 30 percent or above dividends for its shareholders, but scrapping of the facility might discourage corporate bodies from declaring higher dividends.
On the other hand, as the companies paying increased amount of dividends will ultimately bear the impact on net profits, it will ultimately reduce their ability to pay higher dividend. Small investors in the stock will face the negative impact which is not to their interest.
International study reports show that corporate tax is significantly negatively correlated with economic growth. It is suggested that higher rates of corporate income taxes can be most harmful for growth as they discourage the activities of business firms dependent on investment from capital market. Moreover discouraging investment leads to slow down in job creation and further acceleration of income generating activities. What is worse, making a move to raise the corporate income tax does not even increase revenue because the negative growth effects are so large that it causes a shrink to investment and a fall in business turnover. It may be suggested that while refixing corporate taxes the government must see at what cost it is receiving the additional revenue — from an overall rise in business or rather causing a shrink to investment and economic growth at the end.
