India: Dividend distribution tax cannot exceed tax treaty rate (High Court decision)
Taxpayer is entitled to restrict dividend distribution tax rate to treaty rate
The Bombay High Court held that dividend distribution tax (DDT) was, in substance, a tax on dividend income of shareholders, not on the company profits. Consequently, tax treaty provisions dealing with dividend taxation were applicable, and DDT paid by the Indian company on dividends distributed to its UK parent company should be restricted to 10% as provided in the India-UK tax treaty, when the treaty conditions are met. The High Court also held that the Revenue is at liberty to gross-up the tax rate in an appropriate manner.
Background
Prior to March 2020, the domestic companies were liable to pay an additional income-tax, DDT, on dividends declared, distributed, or paid to the shareholders (including nonresident shareholders). As the tax incidence was on the company paying the dividend (and not on the shareholders), the nonresident shareholders were not able to avail the beneficial tax rate provided in the applicable tax treaty for the dividend income. This led to significant litigation on whether DDT rate should be restricted to the tax treaty rate for dividend, with contrary decisions on this issue.
Read a December 2025 report prepared by the KPMG member firm in India