Direct tax proposals in the union budget 1997/98: a preliminary analysis from a corporate finance perspective

Abstract

The Union Budget 1997/98 has significant implications for corporate investment, financing and dividend decisions. While the lowering of corporate tax rates places a premium on efficiency and profitability, lowering of personal tax rates and the proposal for complete tax exemption for dividend have the potential to lower cost of capital. Company managements may have to devote more explicit managerial attention to dividend policy on account of likely increase in investor pressure for stepping up dividend on the one had and the imposition of 10% tax on distributed profits on the other. Preference shares are likely gain a new lease of life as a financing instrument.