Dividend Taxation: Strangling the Indian Entrepreneur
Until 2019, Indian businesses had to pay 20.7% tax if they announced dividends to benefit shareholders. The post-covid ‘reform’ has actually decreased the efficiency of dividends by increasing taxation to 43% in hands of entrepreneurs.
As an entrepreneur, i run a clean business. We show our costs cleanly, follow all the rules, including state laws — which are sometimes very hard to navigate, pay our taxes. The regional Income Tax officers told us once that they have made Srijan the benchmark of how much taxation IT companies should be paying.
After all this, when the company makes a post-tax profit, as a shareholder i should be able to freely withdraw this money and use it for whatever purposes i deem fit. Correct? Wrong!
The situation until 2019
Until 2019, for every Rs.100 announced as Dividends here was the breakup of what companies had to pay:
- Dividend Tax — which the company had to bear, totalling to 20.57%
- Dividend in the hands of the shareholder was tax-exempt
It seems that this taxation was disincentivizing foreign PE investors who had subsidiaries in India. And so as part of the post-covid reform this dividend tax was done away with. An excellent move!
But let’s understand the story further!
The story after post-covid ‘reforms’ : 43% taxation on dividends
In the much talked about post-covid bold reforms, the Ministry of Finance, reformed this situation and did away with Dividend Taxation, thus giving massive relief to large PE corporations who were investing in India…they would now get benefits of not having to pay these Dividend Taxes.
But alongside this, the Ministry of Finance made a reform which would now make all income in the hands of an individual be taxable as ‘income’.
This meant that entrepreneurs like myself who are in the top salary brackets, who already pay a whopping 43% on our salaries, would now have to pay another whopping 43% tax on the dividends announced as well.
If this dividend taxation in the hands of the shareholder, is for shareholders ‘invested in the stock market’, then it is completely absurd and unfair that the govt treats an SME/non-listed shareholder — an entrepreneur who’s built his company from scratch with blood and sweat and sacrifice — at par with an investor in the stock-markets.
This is a like a double & triple whammy and completely completely unjustified.
What do entrepreneurs seek?
If i had money in my hands as dividends, is there much wonder what i would do with it? I have given 20 years of my life, with blood and sweat to build a company. What is it that an entrepreneur seeks:
- Security
- More entrepreneurship
Security
To say that i do not have security, may sound like an idiotic argument to my readers. But no. Barring my salary — which also i started to withdraw with some semblance of a market package — i have rarely withdrawn dividends. So, while Srijan is rich. I am not. As an entrepreneur, if something nasty happens to Srijan tomorrow, i do not currently have the financial security to go without a monthly salary…and rebuild Srijan.
Without this security, at this age, it would be very very hard, if not impossible.
And why have i not been able to create this for myself. Well, because of this immoral dividend taxation regime.
More Entrepreneurship
It’s hard for entrepreneurs to simply sit back and enjoy a retired life. They’re constantly creating new things and new value. In business. In the social/non-profit arena. Some become investors. In either case, it is the love for building things moves them forward in life. And they take risks with their resources at hand — time and money!
Strangling of the Indian Entrepreneur
Without being able to take out a reasonable amount of money from ones own company, for creating financial security for oneself and for having money to invest in bright people and great business ideas, the Indian government is simply strangling the spirits of the Indian entrepreneur.
This situation is very well captured in this article at Zerodha:
“Everyone, from promoters of businesses to professional investors, now chase “growth” and increase valuations to sell their stake in the business instead of trying to earn profits and taking the earnings out through dividends — to save on taxes and earn more efficiently.”
https://zerodha.com/z-connect/rainmatter/bootstrapping-vs-funding-a-tax-arbitrage
Does this promote the promise of ‘Aatmanirbhar Bharat’?
Is this entire dividend tax regime in any manner promoting an Aatmanirbhar Bharat that Modi ji envisions? People like myself, being open supporters of this government, swallow the poison of this humiliation mostly. This issue has bothered me and brewed inside for over a year now…only to finally find some vent now.
Indian entrepreneurs have to be unleashed…and that will happen when such unjustified and even immoral taxation on the wealth-creators is removed!
