Amendment in section 80M

1.     SCOPE OF DEDUCTION UNDER SECTION 80M IN RESPECT OF INTER- CORPORATE DIVIDEND EXPANDED

With effect from 01-04-2020, the Finance Bill, 2020 proposed to abolish the Dividend Distribution Tax and move to the traditional system  of taxation wherein  companies do not pay DDT on dividend and, the shareholders are liable to pay tax on such income at the applicable tax rate. To remove the cascading effect where a domestic company receives dividend from another domestic company, a new section 80M has been introduced. This section provides that inter-corporate dividend received by a domestic co. from another domestic co. shall be reduced from the total income of that company that further distributes such dividend income to the shareholders within one month before the due date of filing of return.

The Finance Bill, 2020 (as passed by the Lok Sabha) expanded the scope of deduction available under Section 80M to include the dividend received from a foreign company and business trust. Thus, a domestic company can claim deduction under section 80M even in those cases where dividend received from a foreign company or business trust is further distributed to shareholders within one month before  the due  date of filing of return.

2.     RATE OF TDS ON DIVIDEND DISTRIBUTED TO A NON-RESIDENT OR FOREIGN COMPANY

With effect from 01-04-2020, the Finance Bill, 2020 proposed to abolish the Dividend Distribution Tax and move to the traditional system of taxation wherein companies  do not pay DDT on dividend and, the shareholders are liable to pay tax on such income. As dividend shall be taxable in the hands of shareholders, the domestic companies are also required to deduct tax while distributing the dividend income to shareholders.

Where the dividend is received by a person resident in India, it shall be chargeable to tax at normal tax rates as applicable in his case. Further, the person paying the dividend shall be required to deduct tax under section 194 at the rate of 10%.

The taxability of dividend income in the hands of a non-resident or foreign company  is governed by the provisions of the domestic law or provisions of double taxation avoidance agreements (DTAA), whichever is more beneficial to the assessee. As per  the Income-tax Act, the dividend received by a non-resident person or a foreign company is taxable at the special rate of 20%. Whereas, as per most of the DTAAs  India has entered into with foreign countries, the dividend is taxable in the source country in the hands of the beneficial owner of shares at the rate ranging from 5% to 15% of the gross amount of the dividends.

The person paying the amount of dividend to a non-resident person or a foreign company shall deduct tax under section 195 at the ‘rates in force’, which  is provided  in Part-II of the First Schedule of the Finance Act. In the Finance Bill, 2020, though the relevant amendments had been proposed for  taxability of dividend income in hands of shareholders and deduction of tax therefrom. But, Part-II of the First Schedule of   the Finance Act was not amended to provide a specific rate for deduction of tax in respect of dividend income. Thus, dividend income was falling in the residuary entry of Part-II of the First Schedule of the Finance Act which provides for deduction of tax at the rate of 30% in case of a non-resident and 40% in case of a foreign company. Thus, the tax would have been required to be deducted at a very higher rate in such cases.

This issue has been resolved in the Finance Bill, 2020 (as passed by the Lok Sabha), Part-II of First Schedule is amended to provide the rate of deduction of tax from dividend income distributed to a foreign company, non-resident Indian or other non-resident person. In case of all such persons, the tax shall be withheld from the dividend income at the rate of 20%. However, where dividend income of a non- resident person is chargeable to tax at the reduced rate as per the provision of   Double Taxation Avoidance Agreement (DTAA) then tax shall be deducted at a rate provided under DTAA.