Income Tax Bill, 2025, has proposed a tougher dividend regime on companies opting for a corporate tax rate of 22 per cent.
Dividends received by these companies from other companies will be taxed both on their accounts and on the hands of shareholders when passed on to the shareholders, creating a situation of double taxation.
Income Tax Act of 1961 did not tax such dividends on the accounts of companies.
Section 80M of the tax law allowed Indian companies to deduct dividends received from domestic or foreign firms and business trusts when redistributing them to shareholders.
Introduced by the Finance Act 2020, this provision prevented double taxation and avoided cascading tax burdens in multi-tier corporate structures.
Under the Finance Act 2020, dividends received from a domestic company before April 1, 2020, are exempt from tax.
After that date, inter-corporate dividends can still be claimed as a deduction if redistributed to shareholders.
For example, if Company A receives ₹100 in dividends from Company B and subsequently distributes it, the amount is not taxable at the corporate level, ensuring taxation occurs only at the shareholder level.
Section 80M applies to all domestic companies, regardless of their tax regime, allowing them to deduct the amount of dividends they distribute before the filing deadline. The shift from Dividend Distribution Tax (DDT) to shareholder taxation was enabled by improved tracking technology, broadening eligibility beyond holding-subsidiary relationships.
The 2025 Bill removes this deduction for companies opting for the 22 per cent tax rate, leading to potential double taxation—once at the corporate level and again at the shareholder level.
However, firms under the concessional 15 per cent tax rate can still benefit from the provision.
An tax expert said, “Under current law, an Indian company is not taxed on dividends received from another Indian or foreign company if those dividends are redistributed within a prescribed timeframe. The new bill maintains this rule except for firms under the concessional 22 per cent tax regime. Given the government’s assurance of no new taxes, this exclusion appears inadvertent and needs urgent clarification.”
Another tax expert highlighted concerns, stating, “The current exemption for inter-corporate dividends in the 22 per cent tax regime appears missing in the new bill. If this stands, many corporations that moved to the 22 per cent rate will face double taxation, necessitating urgent restructuring. It is unclear if this change is intentional or an oversight.”
Another tax expert noted that Section 148 of the new bill retains the inter-corporate dividend deduction but modifies the timeline, requiring companies to distribute dividends at least one month before the filing deadline to qualify.
Another expert pointed out that, like Section 80M, Clause 148 allows deductions only up to the amount of dividends received or distributed, whichever is lower.
Another tax expert observed a discrepancy: while companies under Clause 200 (22 per cent tax rate) lose the exemption, manufacturing firms under Clause 201 retain it. “This inconsistency suggests a possible oversight that may be addressed in later amendments,” he said.
