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. Read this article to know more about the 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.
This section is applicable in respect of dividend distributed on or after the 1st of April 2020 (AY 2021-22 onwards).
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.
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.
The taxability in such cases shall be as under:
The provisions of section 80M remove the cascading effect by providing that intercorporate dividend shall be reduced from the total income of the company receiving the dividend if the same is further distributed to shareholders one month prior to the due date of filing of return.
Dividend received by a domestic company from a foreign company, in which such domestic company has 26% or more equity shareholding, is taxable at a rate of 15% under Section 115BBD. Such tax shall be computed on a gross basis without allowing a deduction for any expenditure.
Dividend received by a domestic company from a foreign company, in which equity shareholding of such a domestic company is less than 26%, is taxable at the normal tax rate. The domestic company can claim a deduction for any expense incurred by it for the purposes of earning such dividend income.
The deduction available to domestic companies can be summarised as follows:
whichever is lesser. The various laws amended/inserted in this regard when read together have the following effect: