The Chennai bench of the Income Tax Appellate Tribunal (ITAT) recently made a significant ruling against Cognizant Technology Solutions India. The ruling states that the company is liable to pay Dividend Distribution Tax (DDT) on a share buyback worth Rs 19,000 crore under a scheme of arrangement. DDT was a tax imposed by the Indian government on companies distributing dividends to shareholders, aimed at taxing dividend income indirectly through the company. However, it was repealed and abolished for Indian corporations in the Finance Act 2020. Now, shareholders are taxed on dividends based on their individual tax brackets. A dividend is a return given by a company to its shareholders from its annual profits.
Facts/Terms for UPSC Prelims
- Income Tax Appellate Tribunal (ITAT): An appellate body in India that hears appeals against income tax assessments and disputes, providing an independent forum for resolving taxation issues.
- Scheme of Arrangement: A legal mechanism used by companies to reorganize their capital, ownership, or operations, often involving mergers, demergers, or share buybacks.
- Dividend Yield: A financial metric calculated by dividing the annual dividend per share by the current market price of a stock, helping investors gauge the income potential of their investments.
- Finance Act: An annual piece of legislation in India that contains provisions related to taxation, among other financial matters, often including amendments to tax laws and regulations.
- Retained Earnings: Profits that a company retains and reinvests in its business instead of distributing them as dividends to shareholders. This is often done to fund growth and expansion.
