What is the classical system?

What is the classical system?

• A. It offers partial relief on dividends
• B. It provides a full tax credit on distributed profits
• C. It taxes dividends twice with no relief
• D. It eliminates corporate tax on distributed profits

Answer: (C)

This question tests how dividends are taxed under the classical system. In this setup, profits are taxed at the corporate level and, when distributed as dividends, are taxed again in the shareholder’s hands with no relief or credit for the corporate tax already paid. So dividends are taxed twice with no relief. The other descriptions imply some relief or a different regime (partial relief, a tax credit, or no corporate tax), none of which describe the classical approach.

This question tests how dividends are taxed under the classical system. In this setup, profits are taxed at the corporate level and, when distributed as dividends, are taxed again in the shareholder’s hands with no relief or credit for the corporate tax already paid. So dividends are taxed twice with no relief. The other descriptions imply some relief or a different regime (partial relief, a tax credit, or no corporate tax), none of which describe the classical approach.