Section 80M of the Income Tax Act- Inter corporate dividends

The Finance Act 2020 has brought with it a slew of measures and reforms to boost the growth of the economy and improve tax administration. In contributing towards reducing the tax and compliance burden on corporates, section 80M has been inserted. 

What are inter-corporate dividends?

When a company receives dividend by virtue of its shareholding in another company, such dividends are known as inter-corporate dividends. Such dividends are exempt from tax when they are received from a domestic company if received prior to the 1st of April 2020.

Eligibility and Scope of Section 80M

• This deduction applies to domestic companies  that have declared dividend and are receiving dividends from other domestic companies (subsidiaries) in any previous year.
• The deductible amount is capped at the amount of dividend distributed by the first-mentioned company on or before the due date for filing its return.
• The deduction under Section 80M would be available to Domestic Company irrespective of the regime under which it pays tax.

Period covered under this section

This section is applicable in respect of dividend distributed on or after the 1st of April 2020 (AY 2021-22 onwards).

Law before Section 80M

Section 80M existed in a different form in the earlier income tax law but was scrapped when the concept of dividend distribution tax (DDT) was introduced into the income tax law via the Finance Act 2003.

DDT was introduced to make it easier to collect the tax at a single point, i.e., in the hands of the company declaring the dividend itself. The technology infrastructure at that time made it difficult to track the dividend income once it was distributed to the shareholders. Thus, tax on dividends was levied at the time of distribution itself and made exempt in the hands of shareholders.

Further, with respect to the dividend distribution tax liability, holding companies received a deduction to the extent of dividends received from subsidiary companies since the subsidiary companies already paid DDT on the same dividend. Hence, double taxation of dividend income was avoided only in the case of holding subsidiary companies.

Law after Section 80M

This section has been brought in as a part of a series of changes focused on shifting the incidence of taxation of dividend income from the payer to the recipient. The current technology infrastructure allows tracking of dividend income and hence provisions related to DDT have outlived its purpose. Further, the scope of the deduction received in respect of dividend income has been expanded to all domestic companies and not just those with a holding-subsidiary relationship, thereby reducing the scope of double taxation of dividend income.

Conclusion

The deduction available to domestic companies can be summarised as follows:

1. Amount of dividend received from domestic companies; or,
2. Amount of dividend distributed prior to the due date of filing return;

whichever is lesser. The various laws amended/inserted in this regard when read together have the following effect:

• The incidence of taxation of dividend income has been shifted from payer of dividend to recipient of dividend.
• The scope of double taxation of dividend income has been reduced.
• DDT was levied at a flat rate using the concept of grossing up without any regard to the rates of tax. Now, the dividend income will be charged at the rates of tax.