India Update on Dividend Distribution Tax : Path-breaking Ruling According a Treaty Benefit to the Foreign Companies that have Invested in India
Published on October 17, 2020
Prior to 1st April 2020, Dividends were taxed in India in a unique way by taxing the company at a flat rate in the form of a Dividend Distribution Tax or DDT instead of taxing the shareholders. This has changed 1st April 2020 by shifting the tax to the shareholders and scrapping DDT. There was a view that even though DDT is a tax on the company, the beneficial treaty provisions should apply if the eventual shareholder is a non-resident investor. This view was not tested and in a recent first of its kind ruling by the Delhi Income Tax Appellate Tribunal (Giesecke & Devrient India Pvt Ltd ([TS-522-ITAT-2020(DEL)) it has been held that the DDT rate would be restricted to the treat rate for taxing dividends.
Please find the attached note on the same along with the case overview and our views thereon. You may also click here to view the updates online: https://www.akmglobal.com/Uploads/image/174imguf_DividendDistributionTaxUpdate_India.pdf
Most of the Indian tax treaties contain a 10% tax rate on dividends vis-à-vis a DDT rate of ~ 20%. The problem with DDT was that in most of the countries, it was not eligible as a credit in the country of residence of the receiving shareholder.
It is expected that many companies will files a refund claim for past years based on this judgment. The department is expected to appeal given the high revenue impact.
Also, even though the ruling is in relation to DDT, this may also lead to challenges to the tax on buybacks.
Please read the views of our Firm’s Tax Partner, Amit Maheshwari in the Indian media on this very important judgment.
Ashok Maheshwary & Associates LLP
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