Preventing Double Taxation of Corporate Dividends : Clause 148 of the Income Tax Bill, 2025 Vs. Section 80M of the Income-tax Act, 1961

Clause 148 Deduction in respect of certain inter-corporate dividends.

Income Tax Bill, 2025

Introduction

Clause 148 of the Income Tax Bill, 2025, and Section 80M of the Income-tax Act, 1961, both address the deduction in respect of certain inter-corporate dividends in the computation of taxable income for domestic companies. These provisions are pivotal in the context of corporate taxation, as they are designed to mitigate the cascading effect of dividend taxation within corporate structures-an issue that has long been debated in Indian tax jurisprudence and policy. The legislative intent behind these provisions is to provide relief to domestic companies from multiple layers of tax on the same stream of dividend income, thus encouraging the flow of investments through corporate chains and fostering a favorable environment for business consolidation and growth.

This commentary undertakes a detailed examination of Clause 148 of the Income Tax Bill, 2025, analyzing its structure, intent, and practical implications, followed by a comprehensive comparative analysis with the existing Section 80M of the Income-tax Act, 1961. The analysis also explores the historical context, policy considerations, potential ambiguities, and compliance requirements, providing a holistic perspective on the evolution and future direction of inter-corporate dividend taxation in India.

Objective and Purpose

The primary objective of both Clause 148 and Section 80M is to alleviate the burden of economic double taxation on dividends as they move through layers of corporate entities. Without such a provision, the same profits could be taxed multiple times as they are distributed as dividends from one company to another and eventually to the ultimate shareholders. This not only leads to an unfair tax burden but also discourages legitimate corporate structuring and investment flows.

Historically, the Indian tax regime has oscillated between taxing dividends in the hands of shareholders and imposing a Dividend Distribution Tax (DDT) at the company level. The abolition of DDT and the reintroduction of classical dividend taxation (i.e., taxing dividends in the hands of recipients) through the Finance Act, 2020, necessitated the revival of Section 80M to prevent cascading taxation within corporate groups. Clause 148 of the Income Tax Bill, 2025, continues this approach, reflecting the legislature's intent to maintain tax neutrality for intra-corporate dividend flows, subject to certain conditions.

Detailed Analysis of Clause 148 of the Income Tax Bill, 2025

1. Structure and Scope

Clause 148 is structured into two main sub-clauses:

1. Sub-clause (1): It provides that if the gross total income of a domestic company in any tax year includes any income by way of dividends from:
   • Any other domestic company; or
   • A foreign company; or
   • A business trust,
   then such domestic company shall be allowed a deduction of an amount equal to so much of the dividend income received from the aforementioned entities as does not exceed the amount of dividend distributed by it by the date one month before the due date for filing the return of income u/s 263(1).
2. Sub-clause (2): It provides that where any deduction in respect of the amount of dividend distributed by the domestic company has been allowed under sub-section (1) in any tax year, no deduction shall be allowed in respect of such amount in any other tax year.

2. Key Provisions and Interpretative Issues

The provision is designed to allow a deduction for dividends received, but only to the extent that the receiving domestic company further distributes dividends to its own shareholders by a specified date. This creates a direct link between the receipt and onward distribution of dividends, ensuring that the benefit of the deduction is available only when the dividend income is not retained but passed on through the corporate chain.

The inclusion of dividends received from not only domestic companies but also foreign companies and business trusts broadens the scope, reflecting the increasing globalization of Indian business structures and the emergence of business trusts (such as REITs and InvITs) as important investment vehicles.

The timing condition-that the dividend must be distributed by the date one month before the due date for filing the return u/s 263(1)-is crucial. It ensures that the deduction is synchronized with the actual flow of dividends and prevents companies from claiming deductions in anticipation of future distributions, thereby aligning the tax benefit with real economic activity.

3. Ambiguities and Potential Issues

• Linkage to Distribution: The deduction is strictly limited to the amount of dividends actually distributed within the prescribed time. This could create practical challenges for companies with fluctuating dividend policies or those facing liquidity constraints.
• Timing of Distribution: The reference to "one month before the due date for filing the return" may create interpretational issues, especially if there are extensions or changes in the due date u/s 263(1).
• Foreign Dividends: The inclusion of dividends from foreign companies raises questions regarding the treatment of withholding taxes, exchange rate fluctuations, and the characterization of such income under double taxation avoidance agreements (DTAAs).
• Business Trusts: The treatment of distributions from business trusts may also require further clarification, particularly in cases where the trust income includes both dividend and non-dividend components.

4. Anti-Avoidance Considerations

The stipulation in sub-clause (2) that no deduction shall be allowed in respect of the same amount in any other tax year is an anti-avoidance measure, preventing companies from claiming multiple deductions for the same distribution over different years. This is essential to maintain the integrity of the provision and prevent potential tax planning abuses.

Practical Implications

1. Impact on Corporate Groups

For multi-tiered corporate groups, Clause 148 provides significant relief from the cascading effect of dividend taxation. It enables holding companies to distribute dividends received from subsidiaries without incurring an additional tax burden on the same income, provided the onward distribution is timely. This facilitates smoother movement of profits within corporate structures and encourages efficient capital allocation.

2. Compliance and Documentation

Companies availing the deduction must maintain robust documentation to substantiate the receipt and onward distribution of dividends, including board resolutions, dividend payment records, and compliance with statutory deadlines. Failure to distribute dividends within the stipulated period could result in the denial of the deduction, increasing the effective tax cost.

3. Interaction with Other Provisions

The provision interacts with various other sections of the Income Tax Bill, including those relating to the computation of gross total income, treatment of foreign dividends, and the definition of business trusts. Companies must carefully analyze the interplay of these provisions to optimize their tax position and avoid inadvertent non-compliance.

4. Tax Administration and Enforcement

From an administrative perspective, the provision places an onus on tax authorities to verify the eligibility of the deduction, including the quantum and timing of dividend distributions. This may require enhanced scrutiny of corporate financial statements and dividend records, potentially increasing the compliance burden for both taxpayers and the tax administration.

Comparative Analysis with Section 80M of the Income-tax Act, 1961

1. Structural Similarities and Differences

A close examination reveals that Clause 148 of the Income Tax Bill, 2025, is substantially modeled on Section 80M of the Income-tax Act, 1961, as amended by the Finance Act, 2020. Both provisions share the same core elements:

• Deduction for dividends received from domestic companies, foreign companies, or business trusts.
• Deduction is limited to the amount of dividends distributed by the recipient company by a specified date.
• Prevention of double deduction across multiple years for the same dividend distribution.

However, there are certain nuanced differences:

• Reference to Filing Deadlines: Section 80M refers to the "due date" as defined in the Explanation to the section (i.e., one month prior to the due date for furnishing the return u/s 139(1)), whereas Clause 148 refers to "one month before the due date for filing the return of income u/s 263(1)." The reference to section 263(1) in Clause 148 (presumably the corresponding provision for return filing in the new legislation) is intended to align with the revised structure of the Income Tax Bill, 2025.
• Terminological Updates: The language in Clause 148 is updated to reflect the new legislative framework, but the substantive effect remains largely unchanged.
• Scope of Applicability: Both provisions apply to domestic companies, but their applicability to dividends from foreign companies and business trusts is a relatively recent development, reflecting the evolution of the Indian corporate landscape.

2. Legislative Evolution and Policy Continuity

Section 80M, in its original avatar, was a key feature of the Indian tax code prior to the introduction of the DDT regime. Its reintroduction in 2020, following the abolition of DDT, marked a return to the classical system of dividend taxation. Clause 148 of the Income Tax Bill, 2025, continues this policy trajectory, reaffirming the legislature's commitment to preventing double taxation of inter-corporate dividends.

3. Practical Differences and Transitional Issues

While the substantive relief under both provisions is similar, the transition from Section 80M to Clause 148 may require companies to revisit their dividend policies and compliance frameworks, especially in the context of changes to return filing procedures and deadlines under the new legislation. Companies must also monitor for any changes in interpretational guidance or administrative practices as the new law is implemented.

4. International Perspective

Many jurisdictions address the issue of inter-corporate dividend taxation through participation exemption regimes or similar provisions. The Indian approach, as reflected in Section 80M and Clause 148, is consistent with international best practices, providing relief for dividends received and onward distributed, while maintaining safeguards against abuse.

Potential Ambiguities and Need for Clarification

• Definition of "Dividend": The precise definition of "dividend" for the purposes of Clause 148 (and by extension, Section 80M) may require clarification, particularly in light of judicial pronouncements and changes in the Companies Act, 2013.
• Treatment of Foreign Source Dividends: Further guidance may be needed on the interaction with DTAAs, credit for foreign taxes, and the computation of eligible deduction in cases involving currency conversion.
• Business Trust Distributions: The treatment of composite distributions from business trusts (including interest, rental income, and capital gains) may necessitate detailed rules to isolate the dividend component eligible for deduction.
• Interaction with Other Tax Incentives: The relationship between the deduction under Clause 148/Section 80M and other tax incentives or exemptions available to companies should be clarified to prevent overlapping claims.

Conclusion

Clause 148 of the Income Tax Bill, 2025, represents a continuation and rationalization of the policy embodied in Section 80M of the Income-tax Act, 1961, providing targeted relief from the cascading effect of inter-corporate dividend taxation. By linking the deduction to actual onward distribution of dividends, the provision ensures that relief is granted only where the economic burden of dividend tax would otherwise be duplicated. The inclusion of dividends from foreign companies and business trusts reflects the evolving nature of Indian corporate structures and the need to align tax policy with global practices.

The practical implementation of Clause 148 will require careful attention to compliance timelines, documentation, and the interaction with other provisions of the Income Tax Bill, 2025. While the provision is a welcome measure for corporate taxpayers, further clarifications may be needed to address ambiguities relating to the definition of dividends, treatment of foreign source income, and the precise mechanics of deduction.

As India continues to reform its direct tax laws, the approach to inter-corporate dividend taxation embodied in Clause 148 and Section 80M strikes a balance between revenue considerations and the need to foster a competitive and investment-friendly corporate tax regime. Ongoing judicial and administrative guidance will play a critical role in shaping the practical contours of this important area of tax law.

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Full Text:

Clause 148 Deduction in respect of certain inter-corporate dividends.

 

Dated: 18-4-2025