The existing regime of taxation of dividend in India is provided in Section 115-O of the Indian Income Tax Act, 1961 (the Act), which is a special provision for the levy of additional income tax on such distributed profits, commonly referred to as dividend distribution tax (DDT), on the amount of dividends declared or distributed or paid by the Indian company. The dividend received is consequently treated as exempt in the hands of the recipient shareholder.

The existing regime of taxation of dividends has led to a debate as to whether the lower rate as provided in the Double Taxation Avoidance Agreement (the treaty) could be applied for taxation of dividends paid by an Indian company to nonresident shareholders.

The DDT, under the present law, has been treated by the Indian Revenue Service (IRS) as the tax imposed in the hands of the Indian company paying dividends and not a liability of the nonresident shareholder, and for that reason the benefit of tax treaty is denied by the tax authorities in India.

The existing regime of taxation of dividends is an obstruction for foreign investors, who in most countries are not able to claim credit for the tax paid on dividends in India.

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Article by: Mr. Neeraj Jain and Ms. Shaily Gupta

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