Abolition of Dividend Distribution Tax

We know BHEL (Rs.40) and National Fertilisers Ltd (Rs.25.65) are high dividend paying companies of India Inc. The dividend yield of the shares of NFL at the CMP of Rs.25.65 is 7.22%. Hence, you should buy and pocket the dividend every year, and at the same time see some capital gains on the stock price. 

Let us see what Moneycontrol.com wrote on it:

Photo: Economic Times

Foregoing Rs.25,000 crore, the FM accepted the industry’s ask to remove the tax on distributed dividends and to tax them in the hands of recipients at their applicable rate. To remove the cascading effect, a deduction will be allowed for the dividend received by holding company from its subsidiary. 

Reverting to the classical system of taxing dividends will be particularly advantageous to foreign investors as they can claim treaty benefit of lower rate of tax, usually at 10 percent to 15 percent, instead of 20 percent. 

Also, they can now claim a foreign tax credit in their home country for tax paid on dividend in India. Shareholders in high tax brackets may have to bear a higher tax burden on the dividend income received. 

However, this is justified in the interest of equitous and progressive taxation. The government is confident of its advanced tracking systems to ensure that there no tax avoidance.

However, there is a need to review the dividends provisions in terms of their impact on REITs / Infratructure Investment Trusts, more so when the government is looking at monetising its assets through REITs. 

Till now, dividend received by REIT/InvIT from 100 percent SPV was not liable to DDT and not taxable either in the hands of REIT/InvIT or investors.

This was based on rationale that SPV paid tax on rental and other incomes earned and hence there is a single point of taxation. But as per the Budget proposal, the unitholders will need to pay tax on dividend income from SPV, received and distributed by REIT/InvIT, leading to double taxation in the hands of SPV and unitholders. This will adversely impact return in the hands of unitholders.

National Fertilisers Ltd: 

For the fiscal year ending March 2019 National Fertilizers Ltd declared an equity dividend of 18.60% amounting to Rs.1.86 per share.

At the current share price of Rs 25.65 this gives a dividend yield of 7.22%; which almost at Par with one year bank interest rates.

The company has a good dividend track record and has consistently declared dividends for the last 5 years.

The company is offering a wide range of products like Kisan Urea, Neem Coated Urea, Bio-Fertilizers (organic fertiliser), Industrial Products (Chemicals) and traded products. It is one of the top 10 agro fertilizers companies in India.

While presenting the Union budget 2020-2021 on February 1, 2020 finance minister Nirmala Sitharaman emphasised that the central government would encourage balanced use of all types of fertilisers, including traditional organic and other innovative varieties to bring about a change in the prevailing regime that encourages excessive use of chemical fertilisers.

Do you remember Non-urea fertiliser subsidy was hiked to Rs.22,875 crore in FY20? NFL (Rs.25.65) also makes organic fertilisers. This move is positive for National Fertilisers Ltd.