Dividend Distribution Tax (DDT) is imposed on the domestic companies when they declare and pay dividends out of the current year profits or accumulated profits or reserves. It is a specific tax, on payment of dividend for the previous year, even when a company has no profits during the current financial year. This article highlights the origin of DDT, the rationale behind it and provides a critical evaluation of the policy during the last 10 years.

Various taxes are levied by the government to form a pool of resources to be used for the collective benefit of the public. The taxation is an exercise of finding a collective solution to individual problems. The taxation structure of a country plays a very important role in its economy. While designing the taxation structure it has to be ensured that it is in conformity with the country's economic and social objectives. In the present economic structure, income tax plays a vital role as a source of revenue and a measure of removal of economic disparity. In India, the taxation structure provides for two types of taxes—direct and indirect taxes. Since Independence, the contribution of indirect tax is always more in the total tax revenue, but due to the growth and expansion of salary and wages classes direct tax collection has increased from 37.7% to 52.05% between 2001-02 and 2007-08 and it is estimated that in 2008-09 it may be 53.07% (Refer Exhibit I). According to government sources, the revised estimate for the year 2007-08 is Rs. 309,065 cr . Similarly, the contribution of corporate tax has increased especially after 1997-98 due to levy of Dividend Distribution Tax (DDT) as an additional tax on the distribution of dividends by the domestic companies. Initially, it was 10% (1997-98) but currently it is charged @15% with a surcharge of 2% and an educational cess of 3%.

In general, the term dividend refers to returns that a shareholder gets from the company, out of its profits on his shareholdings. Dividend is a part of the profit of a company divided among the shareholders in proportion to their shares. It is a part of the profit (after deduction of tax and preferential dividend) for a specific period. It is a normal practice for shareholders to authorise the Board of Directors at a general body meeting to declare a dividend and once it is declared, it becomes a liability for the company to pay the dividend.

Dividend Distribution Tax, DDT, Economic Disparity, Dividend Tax Credit, DTC, Canadian Corporations, Hindu Undivided Family, HUF, Raja J Chelliah Committee, Chartered Accountants of India, ICAI, Financial Management, Financing Decisions, Investment Decisions, Stock Dividend, Taxation Policies.