Applicability Of DTAA Rates To Dividend Distribution Tax Under Section 115-O: A Pre-2020 Analysis
- IJLLR Journal
- Sep 2
- 2 min read
Amandeep Mehta
Introduction
Dividend as derived from its etymological origin ‘dividendum’ means the share of profits of a Company that a Corporate Entity chooses to give to its shareholders. The Finance Act, 2020 has transferred the burden of taxation as regards dividends from Company to the shareholders of the Company from 01.04.2020 onwards. However, prior to the said date, pursuant to Section 115-O of the Income-tax Act, 1961 (“IT Act” or “the Act”), the Companies were being taxed for dividend distribution, instead of the investors/shareholders. This Article delves into the aspects of whether the rate of tax under the standard stipulation of the Double Taxation Avoidance Agreements (“DTAA”) can be made applicable instead of the Dividend Distribution Tax (“DDT”) as mentioned above.
I. Treatment of Dividend in Domestic Law
(i) Outline
Section 2(22) of the IT Act gives an enumerative but not an exhaustive definition of what amounts to a ‘dividend’. The section construes the term dividend in a wide sense as elaborated by the apex court in a catena of judgments. Therefore, for the list of things as laid out in Section 2(22) of the IT Act, there is a liability to deduct tax at source and attract an additional tax liability under section 115-O of the Act. The Dividend Distribution Tax has to be paid in addition to the total income tax liability of the company. It is a tax on dividend (interim or otherwise) declared, distributed or paid by the company out of either current or accumulated profits. The aforesaid tax at the rate of 15% excluding surcharge and cess must be paid by the company within 14 days of incidence of tax. However, it is pertinent to mention that Section 10(34) of the Act, provides for exclusion of dividend income at the behest of investor thereby the tax liability lies at the hand of the Company under Section 115-O of the Act.
