Oct 21, 2020
Dividend taxation puts India in quandary; is it justified to impose additional tax on dividends?
India’s dividend taxation policy has witnessed many changes over the years, guided by varied policy objectives and administrative convenience. India introduced a very unique way to tax dividends by levying Dividend Distribution Tax (DDT) on the companies declaring dividends rather than shareholders, way back in 1997 (leaving one intervening year). We have now from April 2020 reverted to the classical regime of taxing dividends in the hands of shareholders and it is a sweet coincidence that the first major and direct ruling on DDT is out just when we reverted to this classical system.
While some sporadic litigation was going on at various levels, it was always perceived that a tax treaty may not be relied upon for reducing the rate of DDT, and accordingly, no treaty benefit was to be given for dividends paid to foreign companies/non-residents.
However, in a path-breaking, landmark ruling pronounced last week, Delhi ITAT in the case of Giesecke & Devrient [India] Pvt Ltd. held that beneficial rate of tax on dividend under DTAA shall prevail over DDT rate under the domestic law. The ruling traces the historical journey of DDT up to the Finance Act, 2020, concludes that it was a tax on shareholders, the levy of which was shifted upon dividend-paying companies for administrative convenience.