Is Dividend Distribution Tax a Tax on Income of Shareholder? The Debate Continues

Abstract

An inquiry into the innate nature of a tax presupposes examination of an intricate web of variables, which on most occasions results into raging debates. For examples, whether a tax on service provider is a tax on service or a professional tax, whether a tax on capital value of assets is same as wealth tax, whether a tax on tobacco is luxury tax, nature of expenditure tax, etc. are some intriguing controversies into the true nature of various taxes which have received exposition of the Supreme Court. In such cases, the complexities often issues when the characteristics of the tax legislation depart from the ordinarily understood dimensions of a particular tax. The immediate case at hand is of ‘tax on distributed dividend’, or Dividend Distribution Tax (‘DDT’), as it is popularly called which is imposed under a separate Chapter of the Income Tax Act, 1961 (‘ITA’). This tax was introduced in 2000, omitted and reintroduced after a brief hiatus. DDT has since then been in vogue upto March 2020 when its levy was discontinued. Its contours have been examined twice by the Supreme Court, yet the debate on its true nature continues. The exact issue for consideration is whether DDT is a tax on income of the shareholder, which has resulted into extensive debates, particularly in the context of international tax. The inquiry arises from the challenges by taxpayers to the official view of the Government that DDT is not a tax on the income of the shareholder. According to the shareholders, particularly those who are Non-Residents and entitled to invoke Double Taxation Avoidance Agreements (DTAA), DDT is nothing but a tax on income of shareholder and therefore the levy of DDT should also observe the limitations under the DTAA on any tax on dividend in India. The debate is ongoing and has received mixed response. Currently, the issue awaits consideration of the Income Tax Appellate Tribunal. This article seeks to demystify the cause of controversy and the run-up to the present status.