Zerodha’s 100 CR Salary Proposal Highlights India’s Tax Anomalies
The Board of Directors of Zerodha Broking Ltd has adopted a resolution to pay up ₹100 crore salary for three directors. There was a lot of chatter about the move, which prompted company founder Nithin Kamath to clear things up on Twitter. In a nutshell, one of its main defenses is that for a bootstrap company that doesn’t want to sell shares to outside investors, receiving high salaries is one of the most flexible ways for founders to withdraw cash. .
Another option is to receive a dividend, although from a tax standpoint this is now the most inefficient way for a promoter to withdraw cash. Profits generated by Kamath’s business will first be subject to corporate tax of around 25%. The balance, if paid as a dividend, will be subject to tax in the hands of the promoters at the rate of approximately 36%.
In total, about 52% of the company’s income would be paid in the form of taxes. One way to reduce the tax burden is to withhold higher wage income from the business, which will be taxed at a lower rate of 42.7%. From a tax perspective, things would have been much simpler for Kamath and his co-directors if they were willing to sell a marginal stake in the company. After all, capital gains tax is much lower, at 28.5% for unlisted stocks, before indexation benefits are taken into account. That’s the route startup founders typically take – earlier this year, for example, Deepinder Goyal sold a fraction of his stake in Zomato and raised ₹238 crore from outside investors. Zerodha’s founders, however, are determined to be a private company, with no intention of even issuing non-voting shares at this point. They could still consider a share buyback, which has a relatively lower tax impact compared to dividend income.
Importantly, all of this highlights the anomalies in India’s tax policies. Almost two decades ago, Vijay Kelkar’s task force on direct taxes recommended bringing taxes on dividends and capital gains back to par. “Differentiated treatment of dividend / interest income and capital gains introduces opportunities for skewed arbitrage occurring between different maturities and different coupons and also leads to front opportunities for tax purposes. Ideally, total return should be the basis for taxation, ”the committee report said, recommending the elimination of taxes on dividends and capital gains.
But rather than bringing uniformity, almost all government budgets present new opportunities for arbitration. “There are all forms of structuring that take place in some Indian companies to pass off wage income as capital gains income, simply because of the current tax anomaly,” says a finance professor, asking the anonymity. A uniform policy would have allowed Zerodha’s promoters to take cash by receiving dividends and avoid the negative publicity of receiving unusually high salaries. India’s tax policies.
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