Introduction:

The Finance Act 2020 introduces a number of measures and reforms aimed at promoting economic growth and improving tax efficiency. These initiatives include the addition of Section 80M to reduce the tax and compliance burden on companies.

 Section 80M: 

Section 80M of the Income Tax Act, 1961 outlines provisions for the deduction of inter-corporate dividends received by a domestic company from its subsidiary. Enacted through the Finance Act of 2021, this section applies from the assessment year 2022-23 onwards. This blog aims to delve into the intricacies of Section 80M, exploring its provisions in depth.

What is inter-corporate dividends:

Dividends received by company due to its shareholding in another company are known  as inter-corporate dividends. These dividends remain tax-exempt if received from a domestic company before April 1, 2020.

Applicability of 80M:

Section 80M applies to domestic companies declaring and receiving shares from other domestic companies at the same time. These companies distribute earnings one month before the departure date, allowing them to claim a deduction. This provision applies to shares distributed on or after April 1, 2020, commencing with the assessment year 2021-22.

Eligibility  of section 80M:

This deduction applies to domestic companies that have declared dividends and received shares from other domestic companies (subsidiaries) in any previous fiscal year.

The deductible amount is limited to the dividend distributed by the first-mentioned company on or before the due date for filing its return.

Deduction under Section 80M:

Section 80M allows a domestic company to claim a deduction from its gross income for any dividend received from its subsidiary. This deduction is available to the extent that the domestic company holds shares.

Conditions to Claim under  80M :

• To qualify for the  deduction under 80M, the following conditions must be fulfilled.
• The dividend must received from a subsidiary company where the domestic company holds more than 50% of the voting power.
• The shares must be acquired by the domestic company on or after April 1, 2021.
• The subsidiary company from which the dividend is received must have paid taxes on its profits.
• The dividend must included in the total income of the domestic company.
• A domestic corporation cannot be a publicly traded corporation in which the public has a substantial interest.
• The subsidiary from which the domestic company acquires shares must file a declaration, confirming that it complies with the conditions set out in section 80M.

Law Before the section 80M:

• Section 80M previously existed in different forms in earlier income tax law but was eliminated when the concept of dividend distribution tax (DDT) was introduced into the income tax law through the Finance Act of 2003.
• DDT was introduced to streamline tax collection at a single point, namely in the hands of the company declaring the dividend, due to technological limitations at the time, which made tracking dividend income after distribution to shareholders challenging. Consequently, tax on dividends was levied at the distribution stage, with shareholders being exempted from further taxation on these dividends.
• Furthermore, with respect to dividend tax, the holding companies received a deduction equivalent to the dividends received from the subsidiaries, as the subsidiaries had already paid DDT on the same dividends only had the effect of avoiding double taxation of dividend income for dividend-only subsidiaries.

Law After  Section 80M:

This section became delivered as part of a series of adjustments geared toward shifting the incidence of taxation from the payer to the recipient of dividend earnings. With improvements in generation infrastructure taking into consideration the tracking of dividend income, the provisions for Dividend Distribution Tax (DDT) have come to be outdated. Furthermore, the scope of the dividend earnings deduction has been broadened to embody all domestic organizations. Previously, its applicability became limited to protecting-subsidiary relationships, mitigating the danger of dividend income being a situation of double taxation.

Calculation:

• A deduction of 60% will be calculated on income on dividends from other domestic entities, subject to the previously mentioned cap.
• This encourages companies to reallocate dividends, facilitating access to funds and fostering an investment cycle in the corporate ecosystem.

Benefits of Section 80M:

• The proposed tax deduction under Section 80M serves to reduce the tax burden on domestic corporations. This is because a domestic corporation includes dividends from its subsidiary in its gross income and is taxed at the rate available By allowing a deduction for these dividends, the government effectively reduces the effective tax rate for domestic corporations.
• The provision also encourages domestic companies to invest in their subsidiaries, as the profits earned by a subsidiary can be distributed as dividends to the parent company without additional taxes This can result in capital distributions and performed well throughout the group.

Limitations of Section 80M:

• The deduction under section80M applies only to shares received from a subsidiary in which the domestic company holds more than 50% of the voting power. Accordingly, dividends received from other entities such as joint ventures or affiliates are not eligible for this deduction.
• Furthermore, the deduction is not accessible if the domestic company is one where the public holds a substantial interest. This implies that companies listed on stock exchanges or those with widely held shareholding structures may not qualify for the deduction.

Conclusion:

Section 80M of the Income Tax Act, 1961 offers a deduction to domestic companies for inter-corporate dividends received from their subsidiaries. This provision aims to offer relief to companies and encourage them to retain profits within the group. Compliance with the conditions outlined in the section is necessary to claim the deduction.