pri Sec.115O Inter Corporate DDT / Grossing up DDT Rate / Abolish DDT: ICAI Sec.115O Inter Corporate DDT / Grossing up DDT Rate / Abolish DDT: ICAI

a) Inter Corporate Dividend Distribution Tax (DDT)


The Finance Act, 2008 amended the provisions of section 115-O to eliminate the hardship of double taxation arising on account of cascading effect of DDT in case of intercorporate dividend. This is a step in right direction. However, the same mitigates the hardship partially. The real objective should be to eliminate the cascading effect of DDT in case of inter corporate receipt & distribution of dividend. The amendment made in the section is very restrictive as it confines to receipt and distribution of dividend only at one level. It applies only to dividend received by holding company from its subsidiary and that too it applies to only one level. In view of this, the double taxation of DDT continues in all other situations of inter-corporate receipt and distribution of dividends. For commercial and other legitimate business needs, inter-corporate shareholding is almost unavoidable.

Therefore, amendment in section 115-O is required to eliminate the double taxation arising on account of cascading effect of DDT in all such cases. Alternatively, the amendment should not be confined to one level of Holding – Subsidiary relationship. The same should cover all the levels.

It may be noted that in view of the business requirements, which necessitate the formation of subsidiaries, the domestic tax system needs to be tuned in alignment with business requirements. In fact, this problem was recognized in the Income-tax Act itself in old Section 80M which provided mechanism to avoid double taxation in such cases.


For the reasons given, it is suggested that the system of tax credit for the dividend distribution tax paid by the subsidiary companies against the dividend distribution tax payable by the respective holding companies at all levels be introduced.

b) Grossing up of rate of dividend distribution tax


Section 115-O was introduced via Finance Act, 1997 w.e.f 1.6.1997, with a view to reduce the hardship caused to the shareholders due to the procedural work for refund and a lot of paper work. It was provided that any dividend declared by an Indian company will be taxable in the hands of the company and it would be tax free in the hands of the shareholders. The rate of dividend distribution tax was increased over the years to 15% (plus surcharge and education cess).

However, the Finance (No. 2) Act 2014 provided for the rate of dividend distribution tax to be grossed up w.e.f. 1 October, 2014. Thus, the effective dividend distribution tax rate would increase to 17.647% (plus surcharge and education cess). Table below will illustrate the difference in cash outflow after the amendment:

Particulars Pre-Budget Post Budget
Dividend declared 500 500
DDT (Incl. of surcharge and education Cess) 84.975 99.95
Total Outflow for the company 584.97 5 599.95

If the company decides to keep the outflow constant i.e. Rs 584.975/-, then as per the amendment, dividend to be received in the hands of shareholders would reduce to Rs 487.52/- [584.975*500/599.95] as compared to Rs 500/-.

In other words shareholders would receive 2.499% less as compared to what they would have received under the current provisions. Even though dividend income is exempt in the hands of shareholders, it will mainly affect the large number of small shareholders, whose income is below exemption limit or whose taxable income falls within the tax bracket of 10%. (i.e. less than Rs 5 lakhs) as they would have paid tax on dividend received at a lower rate.

Further, the total outflow for the company would also increase by 2.99% (including surcharge and education cess)


In order to encourage small shareholders to invest in domestic companies, it is suggested to drop the requirement of grossing up the dividend distribution tax rate.

c) Abolition of dividend distribution tax (DDT) 


Dividend Distribution Tax was introduced way back in 1997. It was introduced under the basic premise that it will restrict the exorbitant dividends paid by corporate sector. Further, it would give a push to the investments as the corporate sector would prefer to plough back the profits and put it for fruitful purposes. Also, it would put an end to the long drawn and cumbersome process of paper work done by dividend recipient assessees for refund purposes.

The Finance (No. 2) Act, 2014 provided for the rate of dividend distribution tax to be grossed up w.e.f. 1 October, 2014. Thus, the effective dividend distribution tax rate has increased to  7.647% (plus surcharge and education cess). Such high rate of DDT has many problems associated with it as follows:

➢ DDT is a double taxation of the same income as it is calculated after the corporate tax has been paid by the company assessee which is highly unjustified.

➢ It acts as a disincentive for the retail investors to put their money in corporate stocks and shares. Most corporate sector in India do not prefer to declare dividend as high rate of DDT is an impediment and leaves them with limited resources after the distribution. As a result, the retail investors are not getting any regular returns even from profit making companies and hence are reluctant to invest their hard earned money in shares.


In order to do away with highly unjustified double taxation on corporate sector and to act as an incentive for investment in shares to retail investors, it is  suggested that it is high time to do away with the additional income tax in the form of dividend distribution tax under section 115-O of the Income-tax Act, 1961.

In case it is not possible to remove the dividend Distribution tax, a basic exemption limit say 10% of profits/capital be provided where the company distributing Dividend upto 10% is not made liable to DDT.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax) 

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July 2021