Impact of the Income Tax Bill, 2025 on Inter-Corporate Dividends

The Income Tax Bill, 2025, has proposed significant changes that affect the deduction for inter-corporate dividends for companies opting for the 22 per cent tax rate. This update has been highlighted in a report by Business Line, which indicates that these modifications could have substantial implications for businesses.

Under current legislation, companies are allowed to claim deductions for dividends received from both domestic and foreign entities, as well as from business trusts, provided these dividends are passed on to their shareholders. This rule, established under Section 80M as introduced by the Finance Act 2020, aims to mitigate the issue of double taxation on dividends, a common concern in multitier tax structures.

Understanding Inter-Corporate Dividends

To illustrate how this works, consider Company X, which holds shares in Company Y. When Company Y distributes dividends to Company X, those dividends qualify as inter-corporate dividends. Currently, these dividends are exempt from tax, enabling Company X to claim a deduction. Consequently, if Company X distributes the entire dividend to its shareholders, it can effectively avoid taxation on the dividend income.

However, the proposed changes under the new Bill signify that if Company A decides to avail itself of the concessional corporate tax rate of 22 per cent, it will face taxation on the ₹100 dividend it receives because the deduction will no longer be applicable, as reported by Business Line.

Consequences of Double Taxation

This shift implies that shareholders will also be taxed on the same ₹100 dividend, thereby inciting a scenario of double taxation. As highlighted by Himanshu Parekh, Partner, Tax, KPMG in India, this alteration could have far-reaching consequences, resulting in increased tax liabilities across multiple domestic companies that fall under the 22 per cent tax rate.

Parekh comments, “This appears to be an anomaly, which would need to be addressed before the Bill gets enacted.

It’s also noteworthy that while companies subject to the 22 per cent tax rate will lose this deduction, the benefit remains intact for those opting for the concessional 15 per cent tax rate, thus creating a disparity among different corporate tax brackets.

Conclusion

The amendments proposed in the Income Tax Bill, 2025, regarding inter-corporate dividends, could lead to complex tax situations for companies aiming to optimize their tax liabilities. As discussions continue, stakeholders are encouraged to assess the implications thoroughly and advocate for adjustments that foster a fair taxation environment.