Dividend Yields in India May Climb on Tax Proposal, CLSA Says

(Bloomberg) -- India’s budget proposal to abolish dividend tax for companies could encourage more payouts to investors, according to CLSA.

The plan lets domestic companies avoid taxes on dividends received from other firms if they distribute an equal or greater amount of the payout to investors. Companies with a high share of dividend income from subsidiaries, associates and investments will see an increase in profit-after-tax if they pay this amount as dividends, boosting their earnings per share, CLSA said a note this week.

“These tax benefits should help in boosting India’s dividend yield, which is by far the lowest among its Asian peers,” the analysts wrote. “This law aims to ensure any tax on dividends should only be paid by the final beneficiary who chooses to consume this amount rather than further redistribute it.”

According to CLSA, a company where received dividends are 8% of its net profit will see an increase in profits by 2%. In contrast, a company that chooses to pay no dividend will see a cut in profit equivalent to 6% of the amount of dividend income.

The biggest EPS gains will be at Bharti Infratel Ltd., Oil India Ltd., BPCL Ltd., IOCL Ltd., ICICI Bank Ltd., Larsen & Toubro Ltd., Gail India Ltd., ONGC Ltd. and HDFC Ltd., the brokerage said.

The proposal is aimed at eliminating double taxation, according to CLSA. Until now, companies paid as much as 20.6% tax on dividends or returns it distributed to shareholders while the investors received it tax-free. The budget proposes to pass on the tax burden to investors by treating payouts as a part of their regular incomes.

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