• As per the provisions of Section 115-O of the Act, the domestic holding company will not have to pay DDT on dividends paid to its shareholders to the extent it has received dividends from its subsidiary company on which DDT has been paid by the subsidiary. The current provisions give relief in respect of dividend received from only those companies in which the recipient companies are holding more than half of the nominal value of equity capital.
  • Section 115-O of the Act also provides that the domestic holding company will not have to pay DDT subject to the condition that the dividend should be received from a subsidiary, where such subsidiary is a foreign company, and the tax is payable by the Indian company under Section 115BBD of the Act on the dividend received from the foreign company. Section 115BBD of the Act prescribes the tax to be payable @ 15 per cent in case where the dividends are received by an Indian company from a specified foreign company in which the Indian company holds 26 percent or more of the nominal value of the equity share capital. The condition of more than 50 percent holding in Section 115-O of the Act needs to be realigned with the condition of 26 percent holding in case of Section 115BBD of the Act to enable less than 50 percent shareholding entities also to avoid the multiple taxation on dividends distributed.
  • The condition that the dividend should be received from a subsidiary is in a sense restrictive in as much as a company is stipulated to be a subsidiary of another company, if such other company, holds more than half in nominal value of the equity share capital of the company. The said condition is unlikely to be fulfilled by majority of the promoter companies which hold investment in operating companies listed on stock exchanges. Even shareholders of joint venture companies are impacted by the above restrictions. In both the scenarios, since the operating / joint venture company i.e. the company declaring the dividend is not a subsidiary of any company, the first condition i.e. dividend should be received from a subsidiary company is never fulfilled and accordingly when the promoter company / shareholder of joint venture company declares dividend to their shareholders, it cannot deduct the dividend so received from the operating / joint venture company for the purpose of payment of DDT.
  • DDT is currently payable at the basic rate of 15 per cent. Further, dividends distributed by domestic companies and mutual funds will be grossed up for the purpose of computing DDT, translating into an effective tax rate of about 20 per cent (after the levy of surcharge of 12 per cent and cess of 3 per cent).
  • The Memorandum explaining the provision of the Finance (No.2) Bill, 2014 states that prior to introduction of DDT, the dividends were taxable in the hands of the shareholder. However, after the introduction of the DDT, a lower rate of 15 per cent is currently applicable but this rate is being applied on the amount paid as dividend after reduction of tax distributed by the company. Therefore, the tax is computed with reference to the net amount. In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which are actually received by the shareholder of the domestic company need to be grossed up for the purpose of computing the additional tax.

The above memorandum appears to be contrary to the speech of the Finance Minister while introducing DDT in the Budget of 1997-98 stated as follows:

“Some companies distribute exorbitant dividends. Ideally, they should retain the bulk of their profits and plough them into fresh investments. I intend to reward companies who invest in future growth. Hence, I propose to levy a tax on distributed profits at the moderate rate of 10% on the amount so distributed. This tax shall be an incidence on the company and shall not be passed on to the shareholder’. Thus, the then moderate rate of 10 per cent has almost doubled with an effective rate of DDT resulting to about 20 per cent.

  • The earlier DDT rate of 10 percent was comparative in line with the rate of TDS on dividends in most Indian and international tax treaties. The increased basic DDT rate of 15 per cent (effective rate of about 20 per cent) reduces the dividend distribution ability of domestic companies and the uncertainty with respect to its credit in overseas jurisdictions impacts the nonresident shareholders adversely.
  • Currently, DDT is also levied on undertakings engaged in infrastructure development which are eligible for tax benefit under Section 80-IA of the Act. This is detrimental to the growth of infrastructure facility in India. Further, the Finance Act, 2011 has also burdened the SEZ developers by including them in the scope of DDT.


  • It is suggested that all dividends on which DDT has been paid, be allowed to be reduced from dividends irrespective of the percentage of equity holding keeping in mind that investment companies which do not necessarily own/have subsidiaries as they invest in various companies in the open market, be also made eligible for such benefit.
  • The proviso to Section 115-O(1A) of the Act provides that the same amount of dividend shall not be taken into account for reduction more than once. The levy of DDT at multiple levels has been a subject matter of grievance. A part of this issue has been resolved by providing that if a holding company receives dividend from its subsidiary, a further distribution of dividend by the parent will not attract levy of DDT. Promoter holdings in operating companies are not necessarily in a single parent. Also, irrespective of whether there exists a parent-subsidiary relationship, a tax on dividends which have already suffered levy of DDT amounts to multiple taxation which should be avoided. It is therefore suggested that dividends which have suffered DDT be treated as pass through and be not subjected to levy of DDT.
  • Further even Section 115BBD of the Act prescribes for a lower threshold of 26 per cent holding in the foreign company and the dividends received from the foreign company are to be taxed at 15 per cent. Thus, the said threshold should also be reduced in case of Section 115-O of the Act from 50 per cent to a lower limit to enable avoidance of multiple taxation of the same dividends received by the holding companies.
  • The tax rate of DDT is suggested to be reduced to 10 per cent from the current effective rate of about 20 per cent (after including grossing-up of the dividend).
  • To incentivise the investment in infrastructure sector, it is suggested that DDT on industrial undertakings or enterprises engaged in infrastructure development, eligible for deduction under Section 80-IA, may be abolished. It is also recommended that further exemption from DDT be granted to the ‘infrastructure capital company/fund’ with the condition that it invests the dividend received from its subsidiary in the infrastructure
  • The Ministry of Commerce and Industry (Department of Commerce) has recommended the restoration of original exemption from MAT and DDT to SEZ developers and units. In line with these intentions of the Government and to  attract more investment in the SEZs, DDT on SEZ developers and units may be abolished.
Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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June 2021