The controversy of Dividend distribution tax

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The controversy of Dividend distribution tax
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• Dividend distribution tax is one of the most
  controversial topics in the income tax area, and
  it has welcomed many judicial decisions. DDT is a
  tax levied on dividends distributed by companies
  out of their profits amongst their shareholders.1
  This tax had many changes in itself. It was first
  introduced in 2000 through section 115-O of the
  Income tax act this made companies liable to pay
  tax on the distribution of dividends, but it was
  omitted and reintroduced again after some time.
  An inquiry into the innate nature of a tax always
  presupposes many variables, which mainly brings
  out debates on various instances. The discussion
  of this tax started when its levy was
  discontinued in March 2020. The exact reason for
  this issue is whether the DDT is a tax on the
  shareholders income, which has also affected the
  international tax regime.2 Regarding
  international law, it is widespread in the
  international arena to have bilateral tax
  treaties. These tax conventions have established
  many Double tax avoidance agreements. These
  agreements are an arrangement between two or more
  countries aiming to ensure that taxpayers dont
  pay double taxes on the income earned from their
  home country and the host country. The advantage
  of this tax is that the withholding tax brings a
  waiver from being taxed and credits for taxes
  paid on the income that has been taxed twice,
  which can be encashed in the future.
  3

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• DTAA and DDT are the two related concepts that
  have changed Indias dividend tax scenarios. 
  This change in the dividend taxing system affects
  domestic companies the most. Even though these
  incomes were supposed to be charged on the
  Shareholders, but by section 10(34) of the
  Income-tax act, the dividend income is exempted
  for shareholders. But, is this benefit of
  exempted income beneficial for domestic
  companies, which is still controversial in the
  history of tax law.Through this paper, the
  author would like to bring out all the aspects
  related to this shareholders controversy and how
  all the judicial proceedings have brought out the
  changes for the same debate. CHANGES AFTER
  FINANCE ACT, 2020 In the year 1997, DDT was
  introduced by the government through section
  115-O, whose objective was to make companies
  liable to pay taxes on the distribution of the
  dividend earned.4 The main aim of introducing DDT
  was to curb the long process and promote a more
  smooth and more simplistic approach. But in 2020,
  the Indian government presented the finance act,
  2020 which brought significant changes in the
  provisions related to dividend income. It has
  especially in sections 115-O and section 10(34).
  In section 115-O, it is mentioned that the DDT
  tax rate has now been abolished, and all the
  dividend income shall be taxed in the hands of
  the shareholders. On the other hand, the
  abolition of section 10(34), which dealt with the
  exemption of any dividend income, has made clear
  that the dividend received would be taxed to
  shareholders. 

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• Impact on the shareholders Resident
  shareholders There might not be much change on
  the part of the resident shareholders, but there
  are chances that the received income may get
  higher taxability than the current DDT mechanism.
  There wont be any change in the dividend
  received from the foreign company, and only the
  deduction received from a domestic company would
  be subject to be allowed as a deduction.
  Non-resident shareholders Compared to resident
  shareholders, non-resident shareholders benefit
  more through this imposition. The Non-resident
  assessees will now get the credit of such
  withholding tax against tax payable in their home
  country as per the taxation laws in their home
  country. This means that if a non-resident
  shareholder is a resident of a jurisdiction with
  which India has entered into a DTAA, then that
  non-resident shareholder would be beneficial
  under that agreement. 5  JUDICIAL PRONOUNCEMENTS
  There have been various instances when this
  abolishment of DDT of finance act 2020 was
  challenged, and the SC, in this matter, has stuck
  themselves onto the strict provisos
  interpretation. Most of the suits arose seeking
  to link DDT to the shareholders receiving the
  dividend.  One of the early cases of this issue
  is the case of GIESECKE AND DEVRIENT V. ADDL. CIT
  6 , in this case, was the initiation of showing
  that the present change favoured the non-resident
  shareholders. It was held to endorse the NRA and
  that the imposition of section 115-O tax is to
  collect tax from the Indian company. The
  intention was always to tax the shareholders
  income. Hence the relevant DTAA provision would
  be applicable, and that would prevail over the
  higher tax rates.7

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• Another landmark judgement was the GODREJ BOYCE
  MANUFACTURING CO. LTD. V. DEPUTY COMMISSIONER OF
  INCOME TAX 8, which showed how the courts are so
  much influenced by the textualist approach when
  the cases are related to the tax. Firstly the
  Bombay High court declared that a company paying
  the dividend is chargeable to tax on the profits
  of the company, and it would be treated as a
  distinct taxable entity. Thus, through this
  judgement, it was settled by the High court that
  DDT was not a tax on the shareholders income but
  on the company. But soon after the Supreme court
  reversed this judgement, they did not bring out
  their opinion regarding whether the DDT is a tax
  on the income of the shareholder or a tax on the
  shareholder. In line with these judgements,
  another judgement entered this line UNION OF
  INDIA V. TATA TEA 9 , and this judgement changed
  the subject and object of section 115-O. Because
  of this ruling, the NRAs can claim that as the
  object of the tax under section 115-O is the
  shareholders dividend income, the beneficial
  provisions under the DTAA could be invoked. These
  three different judgements are sticking
  themselves to the textualist interpretation of
  the proviso, which clearly shows that the courts
  are clueless regarding these kinds of cases. For
  years, the courts litigation assessment has been
  filing many claims which need to be
  addressed. 

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• CONCLUSION
• To conclude this paper, it can be said that the
  ideal proposal to abolish the dividend
  distribution tax was a good step on the part of
  small shareholders and foreign companies as this
  would welcome many investors and it increases the
  conformity of the domestic companies and the tax
  liability at the hands of significant
  shareholders.10 Regarding the tax payment, this
  imposition has increased the liability for the
  domestic companies, and it has created a
  significant advantage for the non-resident
  assessees. As the framework of DDT is unique, it
  might affect international tax, and the judicial
  decisions have also failed to clarify their
  stance on the issue of DDT. Another gap created
  through this bill is that there is no tax rate
  mentioned for the resident shareholders, which
  might significantly impact the bonafide nature of
  income. It can also be concluded that even though
  the Supreme Court examined the intrinsic nature
  of DDT, the main issue regarding reliability
  under DTAA was not explicitly addressed. It can
  be said through these events that there is a
  close relationship between domestic laws and tax
  treaties which brings considerable alterations in
  the entitlements of the taxpayers.11

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• Business Standard (no date) What is dividend
  distribution tax (DDT), dividend distribution tax
  (DDT) definition, dividend distribution tax (DDT)
  news, Business Standard. Available at
  https//www.business-standard.com/about/what-is-di
  vidend-distribution-tax-ddt (Accessed February
  12, 2023). Jain, T. (2021) Is dividend
  distribution tax a tax on income of shareholder?
  the debate continues, SCC Blog. Available at
  https//www.scconline.com/blog/post/2021/07/05/is-
  dividend-distribution-tax-a-tax-on-income-of-share
  holder-the-debate-continues/ (Accessed February
  12, 2023). DTAA what is a double tax avoidance
  agreement (DTAA) DBS Treasures India (no date)
  DBS. Available at https//www.dbs.com/in/treasure
  s/articles/nri-hub/live-enriched/what-is-a-double-
  tax-avoidance-agreement (Accessed February 12,
  2023). Jain, S.M./ A. (2020) Abolition of DDT and
  its impact, TaxGuru. Available at
  https//taxguru.in/income-tax/abolition-ddt-impact
  .html (Accessed February 12, 2023). Kranti
  Mohan, A.D. (2022) Abolition of dividend
  distribution tax A new paradigm for Equity
  Investments, India Corporate Law. Available at
  https//corporate.cyrilamarchandblogs.com/2020/04/
  abolition-of-dividend-distribution-tax-a-new-parad
  igm-for-equity-investments/ (Accessed February
  12, 2023). Giesecke Devrient India Pvt Ltd v.
  Additional Commissioner of Income Tax (2020).
  Bhatnagar, T. (2021) Dividend payments to
  non-residents DTAA relief on the horizon?,
  Lakshmikumaran Sridharan Top Law Firm in
  India. Available at https//www.lakshmisri.com/in
  sights/articles/dividend-payments-to-non-residents
  -dtaa-relief-on-the-horizon/ (Accessed February
  12, 2023). Godrej Boyce Manufacturing Co. Ltd.
  v. Deputy Commissioner of Income Tax (2017) 7 SCC
  421. Union of India v. Tata Tea Company Ltd.
  (2017) 10 SCC 764 Impact of abolishment of
  Dividend Distribution Tax (2022) Impact of
  abolishment of dividend distribution tax.
  Available at https//www.indialawoffices.com/lega
  l-articles/impact-of-abolishment-of-dividend-distr
  ibution-tax (Accessed February 12, 2023).
  Butani, M. et al. (2020) Indias dividend
  distribution tax An anomaly outside tax
  treaties!, Kluwer International Tax Blog.
  Available at https//kluwertaxblog.com/2020/10/23
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