Is taxing dividend costlier for foreign dividend ?

Recently Budget 2020 has proposed to tax dividend income in the hand of shareholders and have given the benefit u/s 80M to avoid cascading effect. (Cascading effect is when tax is levied on a same income at every step i.e dividend transferred from Co A to Co B to Co C and taxing in the hands of all shareholders which is avoided).

Snapshot of Section 115-O

As per the Section 115-O of the IT Act, a domestic company is required to pay DDT. Moreover, DDT has to be paid only on the net amount of dividend distributed i.e., after deduction of dividend received from:

  • Subsidiary domestic companies, which has suffered DDT;
  • Foreign companies (shareholding ≥ 26%), where tax is paid @ 15% under section 115BBD

Snapshot of Section 80 M

> Remove the cascading effects of tax in circumstance of dividend distribution through multiple layers of companies. Deduction available to a domestic Co receiving dividend income from another domestic Co (does not include foreign company)

> Such dividend income is included in the total income.

> Deduction is granted to the extent distributed by such domestic company from the amount received by the domestic company as dividend.

> Dividend shall be distributed one month prior to the furnishing of return of Income.

Avoidance of Cascading effect extended to all domestic companies – welcome by taxpayers

As per the erstwhile provisions of section 115-O only those companies having Holding-Subsidiary relationship are granted relief for cascading effect which is now extended to all domestic companies irrespective of their corporate structure. This will aid all the domestic companies receiving dividend from the joint venture/ subsidiary/associate or any other domestic company which is depicted below.

Case Study : 1 (Under current regime)

Cascading relief available only in case of holding subsidiary relationship as per provisions of 115-O.

Sr.No Particulars Pre- Amendment
  Company A Company B

(Subsidiary of Company A)

Company C

(Not a  subsidiary of Company A)

(a) Dividend received from Company B/C 100 100
(b) Dividend paid by company A 20 20
(c) Net dividend liable for DDT  (u/s 115-O) 80 100
 (a-b) (a-b) 

Case Study: 2 (Under proposed regime)

Cascading relief available to domestic company for receiving the dividend from another domestic company u/s 80M of the Act

No Particulars Post- Amendment
  Company A Company B (Subsidiary of Company A) Company C

(Not a Subsidiary of Company A)

(a) Dividend received from Company B/C 100 100
(b) Dividend paid by company A (Deduction u/s 80M ) 20 20
(c) Net Dividend before tax in the hands of company A 80 80
(a-b) (a-b)

Foreign dividend now is costlier

Insertion of sec 80M do not extend to dividend income received by a domestic company from foreign companies which make foreign dividend from subsidiary costlier as depicted below

Case study: 3 

Sr No. Particulars Pre Amendment 115-O Post Amendment 80 M
(a) Dividend received by Holding co from foreign Subsidiary 100 100
(b) Dividend paid by Holding co 20 20
(Tax on dividend paid u/s 115BBD)
(c) Dividend Taxable 80 100
(a-b)

Disclaimer:

The views in this budget article are personal views of the Presenter. The budget article presentation is not intended to serve as an advice or address the circumstances of any particular individual or entity. No one should act on such this information without appropriate professional advice which is possible only after a thorough examination of facts / particular situation.

(Author : CA.Darshak shah partner – S N & Co. & Co- Author : Nemish Shah – S N & Co.  Author Can be reached at Tel No : 91-22-28910968 / 24100643 / 49711550 & Email Add: [email protected])

Author Bio

Qualification: CA in Practice
Company: snco
Location: MUMBAI, Maharashtra, IN
Member Since: 18 Feb 2020 | Total Posts: 2

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