INTRODUCTION
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.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 shareholder’s income, which has also affected the international tax regime.
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 don’t 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.
DTAA and DDT are the two related concepts that have changed India’s 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. 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.
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 won’t 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.
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 proviso’s 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 , 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 shareholder’s income. Hence the relevant DTAA provision would be applicable, and that would prevail over the higher tax rates.
Another landmark judgement was the GODREJ & BOYCE MANUFACTURING CO. LTD. V. DEPUTY COMMISSIONER OF INCOME TAX , 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 shareholder’s 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, 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 shareholder’s 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 court’s litigation assessment has been filing many claims which need to be addressed.
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.
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.
Notes
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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/insights/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/legal-articles/impact-of-abolishment-of-dividend-distribution-tax (Accessed: February 12, 2023).
Butani, M. et al. (2020) India’s dividend distribution tax: An anomaly outside tax treaties!, Kluwer International Tax Blog. Available at: https://kluwertaxblog.com/2020/10/23/indias-dividend-distribution-tax-an-anomaly-outside-tax-treaties/ (Accessed: February 12, 2023).
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