The Income Tax Bill 2025 has omitted the deduction for inter-corporate dividends for companies opting for the 22 per cent tax rate, which is allowed under the current Income Tax Act.
Under current law, an Indian company can claim a deduction for dividends received from domestic or foreign companies, or from business trusts, when these dividends are distributed to its shareholders, preventing cascading taxation in multi-tier structures.
This is provided under Section 80M, introduced by the Finance Act 2020. The aim is to avoid double taxation of dividends.
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If Company A owns shares in Company B, any dividend paid by the latter to Company A is considered an inter-corporate dividend. Such inter-corporate dividend received on or after April 1, 2020, is exempt from tax and allowed as a deduction.
“This will have far-reaching ramifications, since there will be a cascading effect on taxation of dividends across multiple domestic companies which are subject to the 22 per cent tax rate. This appears to be an anomaly, which would need to be addressed before the Bill gets enacted,” said Himanshu Parekh, Partner, Tax, KPMG in India.
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How it works
If Company A earns a dividend income of ₹100, it would typically need to pay tax at a rate of 22 per cent or 30 per cent on that amount. However, if Company A distributes the entire ₹100 to its shareholders as dividends, it can claim a deduction, resulting in no taxable dividend income for the company. Consequently, the dividend is taxed only at the shareholder level.
Under the Bill, if Company A opts for the concessional corporate tax rate of 22 per cent, it would still pay tax on the ₹100 dividend, as the deduction would not be available. Additionally, shareholders would also be taxed on the same ₹100, resulting in double taxation.
“The exclusion could lead to multiple levels of taxation on dividends, making them less tax-efficient and necessitating restructuring before declaring dividends as those under a concessional tax regime cannot revert to the original tax regime,” said Vinita Krishnan, Executive Director at Khaitan & Co.
The benefit of dividend deduction, however, remains available for companies subject to the concessional 15 per cent tax rate.