Dividend is taxable in India under section 115O of the Income tax Act, 1961. Effective rate of Dividend Distribution tax from 1st April 2007 is 16.995% (15% basic rate + 10% surcharge + 2% education cess and 1% higher education cess). This tax cannot be avoided on payment of dividend, even if no income tax is payable by the company on its total income.
This dividend distribution tax (DDT) should be paid within 14 days of declaration of dividend or distribution of dividend or payment of dividend whichever is earlier.
This dividend distribution tax has bigger implications for attraction of foreign investments given that ultimately the effective tax rates on profits work out to 50% considering income tax of 33% and dividend tax of 16.995%. There is a strong case to reduce / remove this DDT if India has to emerge as a major destination for attracting foreign investments.
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