Tax laws related to dividend distribution have been a point of discussion for a long time, initially for the kind of tax system applicable to it and then for the way it will look for different beneficiaries and tax payers. The recent Income Tax Appellate Tribunal decision in Mumbai in Polycab India Limited v The Assistant Commissioner (2025) has sparked discussion on dividend distribution tax (DDT) in tax law circles. DMD Advocates’ founder, senior partner and managing partner of the Delhi office, Anuradha Dutt, explains the concept.
Q1. What is dividend distribution tax?
A dividend means the portion of the profit received by the shareholders from the company’s net profit, which is legally available for distribution. Therefore, it is a return on the share capital subscribed for and paid to its shareholders by a company. Modes of taxing dividends are either the classical method, that is, in the hands of the shareholders or the simplistic method, which involves taxing the company that distributes the dividend. In India, the simplistic method is applied.
Q2. Why is DDT a focus of debate among authorities?
Previously, the classical method was followed. In 1997, the simplistic method was introduced where a tax on dividends would be paid by the company distributing them and no further incidence of tax would be leviable in the hands of shareholders. This was changed in 2002, brought back in 2003 and then finally again done away with in 2020 reverting to the classical method.
A major element here was that although it is easier to collect tax from the company, shareholders may pay a lower tax on the dividend received depending on their income or various relief provisions in the law and/or double taxation treaties and/or other enactments, which may give some class of shareholders complete relief from the payment of dividend distribution tax.
Q3. What is the established law on DDT – is it payable or to be refunded?
This question has come up multiple times before judicial authorities. Rulings in , , were important in deciding the nature of DDT.
Now, no DDT is payable by the company except tax deducted at source depending on whether it’s a domestic shareholder or a non-resident shareholder. The dividend is chargeable in the hands of the shareholder and, therefore, if the shareholder is exempt under any law from making a payment of tax, then no tax is payable by the said shareholder.
Q4. How does the recent ruling in the Polycab case affect established law?
The ruling in this case deals with the financial years between 2017 and 2020, when the liability of paying tax on dividends was with the shareholders. The ruling is limited to the International Finance Corporation (IFC), which has immunity under the IFC agreement and the IFC Act that overrides all existing laws in India. Therefore, ordinary shareholders who are residents of India and/or non-residents who have no such immunity under the law will not be covered by the judgment in Polycab. The question of whether a double taxation treaty will be available to a non-resident is covered by the Total Oil case, which negated such applicability unless a domestic company was exempt from the DDT payment for such non-residents of other contracting states.
