Section 80M of the Income Tax Act: A Detailed Overview
- Bhavika Rajput
- 2 hours ago
- 7 min read
To make tax compliance easier for Indian domestic businesses, Section 80M was included by the Finance Act of 2020. This provision's main goal is to lessen the tax burden on businesses that get dividends from other businesses. By permitting deductions for dividends received by domestic corporations, Section 80M seeks to remove dividend double taxation and improve the efficiency and tax-friendliness of corporate tax administration. In this article, we will provide a detailed overview of Section 80M.
Table of Contents:
What is Section 80M?
In order to offer tax relief to domestic companies that receive dividends from foreign companies, business trusts, or other domestic companies, Section 80M was introduced. In order to avoid double taxation, the clause enables a business to claim a deduction for dividend income received. This implies that, unlike under the Dividend Distribution Tax (DDT) regime before 2020, a company's dividend income is only taxed at the recipient's tax rate rather than at the time of distribution. Businesses are protected from paying the full tax burden on inter-company dividends, which are frequently paid out in corporate group arrangements, thanks to the implementation of Section 80M. The purpose of the provision was to encourage investment in corporate groups by facilitating the retention of profits within the group and allowing corporations to take advantage of lower tax obligations.
Key Features of Section 80M
Deduction Eligibility: Under Section 80M, domestic businesses that receive dividends from foreign businesses, business trusts, or other domestic businesses are eligible for a deduction. Regardless of whether the business is subject to the old or new tax systems, the deduction is still accessible.
Deduction Limit: The amount of dividends that can be written off under Section 80M is unlimited. As long as the domestic firm receives the inter-corporate dividend within the allotted time, the full amount of the dividend can be deducted. For corporate companies, this is a huge comfort because it lowers their total tax obligation.
Dividend Distribution Requirement: The domestic company must distribute the dividend it has received within one month of the income tax return filing deadline in order to be eligible for the deduction. This guarantees that the corporation does not hoard the dividend income but rather uses it correctly.
Applicability Period: Dividends received on or after April 1, 2020, are subject to Section 80M's requirements, and the tax benefit is accessible for the assessment year 2021–2022 and beyond. This clause is a significant step towards increasing the transparency and ease of compliance of the tax system for businesses.
Eligibility and Scope of Section 80M
Domestic businesses that declared dividends and received dividends from other domestic businesses (subsidiaries) in any prior year are eligible for this deduction. The amount of dividends paid out by the first-mentioned corporation on or before the deadline for filing its return caps the deductible amount. Domestic companies would be eligible for the deduction under Section 80M regardless of the tax system in which they are paid.
Conditions for Claiming the Deduction under Section 80M
The following requirements must be met by a domestic business in order to claim the deduction under Section 80M:
The company must possess above 50% of the voting power in the subsidiary company from which it receives dividend.
The company's overall revenue must include the dividend.
The domestic corporation cannot be one in which a significant portion of the public has a stake (i.e., listed companies with widely held shareholding structures).
The dividend needs to come from a subsidiary that has already paid taxes on its earnings.
The domestic business must provide the subsidiary business with a declaration to attest its compliance with all of the requirements u/s 80M.
Period Covered under Section 80M
This section applies to dividends paid out on or after April 1, 2020 (beginning with AY 2021–2022).
Law Before Section 80M
When the idea of dividend distribution tax (DDT) was implemented by the Finance Act of 2003, Section 80M, earlier existing in a different form, was eliminated. DDT was created to facilitate tax collection at a single location, namely, by the corporation that declared the dividend. It was challenging to monitor dividend income after it was disbursed to shareholders due to the technological infrastructure in place at the time. Consequently, dividends were taxed at the moment of distribution and went free of taxation in the hands of shareholders. Furthermore, because the subsidiary firms had already paid DDT on the same dividend, holding corporations were exempt from paying the dividend distribution tax responsibility to the extent of the dividends received from the subsidiary companies. As a result, only holding subsidiary firms were exempt from double taxation on dividend income.
Law After Section 80M
This section was introduced as part of a set of reforms aimed at shifting the burden of dividend income taxation from the payer to the recipient. The regulations pertaining to DDT have outlived their usefulness because the existing technological infrastructure permits the tracking of dividend income. Additionally, all domestic companies—not just those with a holding-subsidiary relationship—now qualify for the dividend income deduction, which reduces the possibility of dividend income being twice taxed. In these situations, the taxability will be as follows:
Another domestic company pays a dividend to the domestic company. By stating that an intercorporate dividend will be deducted from the total income of the company receiving it if it is also distributed to shareholders one month before the return filing deadline, section 80M ousts the cascading effect.
A foreign company pays a dividend to a domestic company. Section 115BBD imposes a 15% tax on dividends received by domestic companies from foreign companies in which the local business owns at least 26% of the equity. Without permitting a deduction for any expenses, this tax will be calculated on a gross basis. If a domestic firm receives a dividend from a foreign corporation and its equity shareholding is less than 26%, the dividend is subject to the regular tax rate. Any expenses made by the domestic firm in order to generate such dividend income may be deducted.
Quantum of Tax Deduction Under Section 80M
Domestic businesses are eligible for a deduction under Section 80M of the Income Tax Act based on the lesser of:
The quantity of dividends obtained from domestic businesses or
The amount of dividends paid out within a month of the income tax return filing deadline.
Due to this change in tax incidence, dividends are no longer subject to double taxation through Dividend Distribution Tax (DDT), but rather are taxed in the recipient's hands. Dividend income is now taxed in accordance with marginal tax rates, whereas previously DDT was a flat rate that did not take the recipient's marginal tax rate into account.
Illustration: Let's say that domestic company B Ltd. received a dividend of Rs. 12 lakhs from another domestic company, A Ltd. Then, within the allotted period, B Ltd. announced and disbursed Rs. 7 lakhs as a dividend. Since B Ltd. declared and paid out Rs. 7 lakhs as a dividend, they would be qualified for a deduction under Section 80M in this case.
Impact of Section 80M
Section 80M signifies a change in the way dividends are taxed, moving the burden from the payer company—the business that declares the dividend—to the recipient company—the business that gets the dividend. This adjustment enables more equitable taxation by bringing the tax burden into line with the actual recipient's tax bracket.
Businesses can also comply with tax laws more easily thanks to this provision. Since DDT was eliminated, businesses must now include dividend income on their tax filings, while they are still able to deduct any dividends they receive.
Section 80M makes it possible for corporate groups with holding-subsidiary connections to arrange their taxes more effectively and manage their capital better. Receiving tax-free dividends from subsidiaries enables holding corporations to disperse these monies to shareholders or reinvest them in other areas of their business as needed.
Conclusion
For Indian domestic businesses, Section 80M is a useful provision that provides a much-needed deduction on inter-corporate dividends. It encourages investment within company groups, streamlines tax administration, and helps prevent double taxation. With no cap on the deduction and a straightforward application process, Section 80M is a useful tool for helping firms control their tax obligations while promoting expansion. Provisions like Section 80M are essential to improving the efficiency and business-friendliness of the tax system as the corporate environment changes.
Frequently Asked Questions
What are inter-corporate dividends?
Inter-corporate dividends are payments that a business receives as a result of owning stock in another business. Dividends of this type from domestic companies are tax-exempt if they are received before April 1, 2020.
How does Section 80M benefit holding companies?
Because Section 80M enables holding companies to deduct dividends from subsidiaries, it lowers their tax obligation, improves cash flow, and improves capital allocation within the corporate structure.
Can foreign companies claim deductions under Section 80M?
No, Section 80M deductions are not available to foreign corporations. Only domestic businesses that earn dividends and then distribute them to their shareholders are covered by the clause.
What tax rate is applicable to inter-corporate dividends received by a domestic company?
Depending on the situation, a domestic company's inter-corporate dividends are taxed at the applicable corporate tax rates, which may be 15%, 22%, or 30% of its total revenue.
Is there a limit on the amount of dividend eligible for deduction under Section 80M?
No, the amount of dividends that can be deducted has no upper limit. Section 80M allows for the entire deduction of all inter-corporate dividends received prior to the ITR deadline.
What types of dividends are eligible for deduction under Section 80M?
If they fulfil the necessary eligibility requirements, dividends received from domestic or foreign corporations or business trusts are deductible under Section 80M. Businesses can avoid double taxation on inter-corporate dividends by leveraging this section.
What happens if a company does not distribute the dividend within the required time frame?
The business forfeits its eligibility for the Section 80M deduction, which raises its taxable income, if the dividend is not paid out at least one month prior to the income tax return filing deadline.
Is Section 80M deduction available for dividends received from joint ventures?
No, only dividends from domestic or foreign corporations or business trusts are eligible for Section 80M deduction.
Can a partnership firm or LLP claim a deduction under Section 80M?
No, partnership firms and limited liability partnerships are not eligible for the deduction under Section 80M; only domestic entities are.
Can a foreign parent company claim Section 80M deduction for dividends from its Indian subsidiary?
No, the deduction under Section 80M is available only to domestic companies getting dividends from other domestic, foreign companies or business trusts.
Can Section 80M deductions be carried forward to future years?
No, the Section 80M deduction is not transferable to subsequent years.
Is Section 80M available under the new regime?
Yes, domestic companies can access Section 80M regardless of the tax regime they use.
Related Posts
See AllThe Income Tax Act contains a few clauses that permit deductions for allocating a specific sum of money to funds designated for...
Obtaining an insurance firm license from the state's insurance commissioner is a prerequisite for selling insurance products. The entire...
Since it is an essential instrument for guaranteeing food security for Indian inhabitants, the ration card is very important. A ration...
Comments