Understanding Section 80M of the Income Tax Act

March 3, 2023

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Section 80M of the Income Tax Act, 1961 provides for the deduction of inter-corporate dividends received by a domestic company from its subsidiary. The section was introduced in the Finance Act, 2021, and is applicable from the assessment year 2022-23 onwards. In this blog, we will discuss the provisions of Section 80M in detail.

Table of Contents

Meaning of Inter-corporate Dividend

Inter-corporate dividend means the dividend paid by one company to another company in which it holds more than 50% of the voting power. The dividend may be paid out of current profits or accumulated profits.

Deduction under Section 80M

Section 80M provides that a domestic company can claim a deduction from its total income in respect of any dividend received from its subsidiary company. The deduction is available to the extent of the amount of dividend received by the domestic company.

Conditions to Claim Deduction under Section 80M

In order to claim a deduction under Section 80M, the following conditions must be satisfied:

The dividend must be received from a subsidiary company in which the domestic company holds more than 50% of the voting power.
The dividend must be included in the total income of the domestic company.
The dividend must be received by the domestic company on or after 1st April 2021.
The domestic company must not be a company in which the public are substantially interested.
The subsidiary company from which the dividend is received must have paid tax on its profits.
The domestic company must have furnished a declaration to the subsidiary company from which the dividend is received, stating that it satisfies the conditions laid down in Section 80M.

Impact of Section 80M

The introduction of Section 80M has provided relief to domestic companies in the form of a deduction for inter-corporate dividends received from their subsidiaries. This has incentivized companies to retain profits within the group and distribute them as dividends to their parent company.

Benefits of Section 80M

The deduction available under Section 80M can help reduce the tax liability of domestic companies. This is because the dividend received by the domestic company from its subsidiary is added to its total income and taxed at the applicable rate. By providing a deduction for such dividends, the government has reduced the effective tax rate for domestic companies.

The provision also incentivizes domestic companies to invest in their subsidiaries, as the profits earned by the subsidiary can be distributed as dividends to the parent company without any additional tax liability. This can lead to better capital allocation and improved performance of the group as a whole.

Impact on Shareholders

The deduction under Section 80M is available to the domestic company that receives the dividend, and not to the shareholders of the company. However, the provision can indirectly benefit shareholders by increasing the profits and cash flows of the parent company. This can lead to higher dividend payouts and improved returns for shareholders.

Limitations of Section 80M

The deduction under Section 80M is available only for dividends received from a subsidiary company in which the domestic company holds more than 50% of the voting power. This means that dividends received from other companies, such as joint ventures or associates, are not eligible for the deduction.

In addition, the deduction is not available if the domestic company is a company in which the public are substantially interested. This means that companies listed on stock exchanges or those with widely held shareholding structures may not be eligible for the deduction.

Impact on Small and Medium Enterprises (SMEs)

Section 80M can be particularly beneficial for small and medium enterprises (SMEs) that operate as part of a group structure. SMEs often have subsidiaries that are closely held and may not have significant external shareholders. By providing a deduction for inter-corporate dividends, Section 80M can help these SMEs to optimize their tax position and improve their cash flows.

For example, consider a scenario where a domestic company (parent) holds 100% of the shares of its subsidiary (child). The subsidiary earns a profit of Rs. 10 lakhs and distributes the entire amount as dividends to the parent company. Under the pre-Section 80M regime, the parent company would have to pay tax on the dividend income at the applicable rate, say 25%. This would result in a tax liability of Rs. 2.5 lakhs. However, under Section 80M, the parent company can claim a deduction for the entire amount of dividend received, resulting in zero tax liability.

Impact on Tax Planning

Section 80M can be used as a tax planning tool by domestic companies. By retaining profits within the group and distributing them as inter-corporate dividends, companies can optimize their tax position and reduce their overall tax liability.

For example, consider a scenario where a domestic company has a subsidiary that earns a profit of Rs. 10 lakhs. The domestic company can choose to distribute the entire amount as dividends to the parent company, thereby availing the deduction under Section 80M. Alternatively, if the subsidiary had paid tax on its profits, the domestic company may choose to retain the profits within the subsidiary and reinvest them in the business. This would defer the tax liability to a later period and provide additional capital for the subsidiary to grow.

Conclusion

Section 80M of the Income Tax Act, 1961 provides a deduction to domestic companies for inter-corporate dividends received from their subsidiaries. The section has been introduced to provide relief to companies and incentivize them to retain profits within the group. The conditions laid down in the section must be satisfied in order to claim the deduction.

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Frequently Asked Questions (FAQs)

What is Section 80M of the Income Tax Act?

Section 80M is a provision in the Income Tax Act that allows domestic companies to claim a deduction for inter-corporate dividends received from their subsidiaries.

2. What is the maximum deduction available under Section 80M?
The deduction under Section 80M is equal to the amount of dividend received from the subsidiary.

3. Is the deduction under Section 80M available for dividends received from joint ventures or associates?
No, the deduction under Section 80M is available only for dividends received from a subsidiary in which the domestic company holds more than 50% of the voting power.

4. Is the deduction under Section 80M available for dividends received from foreign subsidiaries?
Yes, the deduction under Section 80M is available for dividends received from both domestic and foreign subsidiaries.

5. What is the tax rate applicable to inter-corporate dividends received by a domestic company?
Inter-corporate dividends received by a domestic company are added to its total income and taxed at the applicable rate.

6. Can the deduction under Section 80M be carried forward to future years?
No, the deduction under Section 80M cannot be carried forward to future years.

7. Is the deduction under Section 80M available for companies listed on stock exchanges?
No, the deduction under Section 80M is not available if the domestic company is a company in which the public are substantially interested, such as those listed on stock exchanges.

8. Can the deduction under Section 80M be claimed by a foreign parent company for dividends received from its Indian subsidiary?
No, the deduction under Section 80M is available only to domestic companies that receive dividends from their subsidiaries.

9. Can the deduction under Section 80M be claimed by a partnership firm or LLP?
No, the deduction under Section 80M is available only to domestic companies and not to partnership firms or LLPs.

10. Is there any limit on the amount of inter-corporate dividends that can be claimed as a deduction under Section 80M?
No, there is no limit on the amount of inter-corporate dividends that can be claimed as a deduction under Section 80M. The entire amount of dividend received from the subsidiary is eligible for the deduction.