Effect of changes in taxation laws on corporate dividend policy

Abstract

Abstract: )) Introduction and context description Measuring the effect of changes in taxation laws on corporate dividend policy. 2) Research Questions Whether the applicability of the Dividend Distribution Tax (DDT) regime as against taxation of dividends in the hands of the shareholders has any effect on the corporate dividend policy. • The extent to which corporate dividend policy is affected by changes in taxation laws as compared to the other factors affecting dividends. 3) Methodology Performing a literature survey to understand the various factors that affect the formulation of the corporate dividend policy. • Studying the important sections of the Income Tax Act, 1969 and the changes therein that have a significant effect on the dividend policies for the period 1988 to 2005. • Carrying out simple analyses on the selected sample to observe the increase / decrease in the dividends paid based on the changes in the tax regimes, • Developing a regression model using Limdep Software with the dividends paid as the dependent variable and the factors affecting dividend policy including taxation as the independent variables. 4) Findings . Companies do not always develop their dividend policy by taking into account the changes in the taxation policy as there are several other factors that may have a greater influence on the dividend policies. • Under the DDT regime, companies prefer to pay lesser dividends as DDT increases the total cash outflow of the companies when they pay dividend. 5) Limitations of the study » In the case of some companies in the sample, data was not available for some of the years under study. This led to the panel data being unbalanced and limited the usage of other software for the analysis. There were some factors for which there was no data available and hence only a qualitative study could be performed on them. * Given the multicollinearity between some of the factors that needed to be used in the regression model, some of the variables could not be included while constructing the model 6) Scope for further work Future research can take into account factors like target dividend ratio which needs to be incorporated in the model 7) Key words Dividend, Changes, Taxation 8) Learnings In the literature survey, there were several works that examined the effects of various factors on the dividend policies of the companies. However) there was little discussion on the interplay of these factors and determination of the extent to which each of them influences the dividend payment. • In order to build the regression model, a detailed understanding of all the relevant sections of the Income Tax Act that affect dividend policy is needed. The regression tests for measuring the effect of taxation on dividends were carried out using Umdep software. Understanding the working of the software and using it to derive results proves to be a major challenge.