Introduction

In a historic move, Union Budget, 2020 marked Indian’s return from the dividend distribution tax (DDT)regime to the classical system of dividend taxation. The tax shift was obvious – going forward, shareholderswould pay tax on dividends instead of the distributing company. While many taxpayers rejoiced, a deeper diverevealed that the policy shift came with a new set of problems. In this article, we reflect on the key issues thatsurround India’s new dividend tax system ahead of the budget.

Historical underpinnings

The rationale to introduce DDT was two-fold. First, the Government sought to encourage companies to ploughback profits instead of distributing them to its shareholders. Second, the Government wanted to ensure thatdividend income did not escape taxation. It was easier to recover taxes from the companies distributingdividends, instead of chasing shareholders. However, this was during an era where computer assistedprocessing of information and electronic matching of records was not prevalent.

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This article was originally published in Taxmann on 11 January 2021 Co-written by: Gouri Puri, Partner; Nimish Malpani, Associate. Click here for original article

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This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.