DDT was first introduced in India in 1997 to encourage Indian companies to re-invest profits for expansion and growth, as well as to simplify collection of taxes on dividend. Under this system of dividend taxation, foreign shareholders were often unable to claim any double tax relief for the tax paid on dividend in India in their respective countries of residence because DDT was an indirect tax not covered in tax treaties. Hence, foreign shareholders (for instance, Dutch and U.K. companies) received dividends from Indian companies after deduction of about 20% DDT (15% plus surcharge and cess). The DDT applied over and above the tax Indian companies paid on profit (CIT) and was typically not creditable at the hand of the recipient companies. Therefore, DDT significantly lowered the rate of return on investments made by foreign companies.
