The answer to your question requires tracing of the entire history on this debate. But briefly, the reason is interest is allowed as expenditure while computing business income, whereas dividend is not because it is perceived as appropriation of profits among owners. Since the company has not paid tax on its income to the extent interest has been allowed as expenditure, the interest earners should pay tax.

By the same token, since the company has already paid tax on the income, including what it has paid as dividend, there would be double taxation if the same were to be taxed again in the hands of the shareholders. Fair enough. That is why in 1997 dividend was made tax-free so as to stop double taxation that was happening hitherto. However, the Finance Minister introduced a new tax simultaneously called dividend distribution tax (DDT) which is in vogue even today. Starting with 12.5 per cent, today it is 15 per cent. This tax has to be paid by the company declaring dividend. DDT thus has brought back the problem of double taxation in a new form — now dividend is doubly taxed in the hands of the company itself.

A lasting solution to this problem could be to allow dividend as expenditure just as interest is allowed. But this simple solution has not been accepted.

What is the difference between firm allotment and allotment through public offer?

K. P. Shinod, email