FinMin may restore dividend deductions for 22% corporate tax regime

The Finance Ministry (FinMin) is likely to amend the Income Tax Bill 2025 to restore the deductions for inter-corporate dividends for companies opting for the 22 per cent concessional tax regime. The move is linked to stakeholders raising concerns about the omission leading to double taxation.

 

"This appears to be an inadvertent omission in the new Income Tax Bill. We will address and rectify it as taxing the same income twice goes against established principles of fair taxation,” a finance ministry official said on the condition of anonymity.

 

An email query sent to the finance ministry remained unanswered till the time of going to the press.

 

Under the existing tax regime, domestic companies are taxed at three different rates, depending on their chosen structure: 15 per cent for new manufacturing companies that meet specified conditions, 22 per cent for companies that opt out of exemptions and deductions (under Section 115BAA), and 30 per cent for companies that continue to avail themselves of various tax breaks.

 

The benefit under Section 80M of the Income Tax Act, 1961, allowing a company to claim a deduction on dividends received from another domestic company in which it holds shares, provided the amount is further distributed to its own shareholders, was introduced via the Finance Act, 2020. This came after the abolition of the Dividend Distribution Tax (DDT) to prevent cascading tax incidence on the same income. 

 

However, the new draft Bill proposes to omit Section 80M altogether for companies opting for the 22 per cent concessional tax rate. But companies choosing the 15 per cent and 30 per cent tax rates will remain eligible to avail themselves of the benefit given under Section 80M. The absence of Section 80M would have effectively led to the same dividend income being taxed twice — first in the hands of the receiving company, and again when redistributed to shareholders in case of companies going for 22 per cent.

 

In response to the feedback from industry stakeholders and tax professionals, the finance ministry has clarified that the omission of Section 80M was unintentional and that the government is committed to resolving the issue through legislative amendments.

 

"The clarification from the finance ministry comes as a big sigh of relief to corporates, since the provision as currently drafted could have led to cascading effect of taxation of dividends in the case of companies and their shareholders," said Himanshu Parekh, partner, KPMG.

 

According to Samir Kanabar, tax partner with EY, dividend taxation has seen multiple flip flops. "Having said that, the purpose of the new Income Tax Bill is not to bring any major policy change. Thus, it's paramount to not just retain the tax structure, but also provide certainty and thereby instill greater degree of confidence among taxpayers," added Kanabar.

 

The Bill is currently being examined by a select committee of Parliament, which is scheduled to submit its report on the first day of the Monsoon Session. 

What the Bill proposes

*  To omit Section 80M for firms opting for 22% concessional tax rate

  *  Firms opting for 15% and 30% tax rates eligible to avail of the benefit

 

Issue: Absence of Section 80M would have led to double taxation of  dividend income

  Measure: Govt committed to resolving issue through legislative amendments