Section 80M

What is Section 80M?

Section 80M was introduced to provide tax relief to domestic companies that receive dividends from other domestic companies, foreign companies, or business trusts. The section allows a company to claim a deduction for the dividend income received, ensuring the income is not subject to double taxation. This means that the dividend income received by a company is only taxed at the recipient’s tax rate, rather than at the point of distribution, as was the case under the Dividend Distribution Tax (DDT) regime prior to 2020.

The introduction of Section 80M ensures that businesses do not bear the full tax burden on inter-corporate dividends, which are common in corporate group structures. The provision was enacted to promote investment within corporate groups, making it easier for companies to retain profits within the group and benefit from the reduced tax liabilities.
 

Key Features of Section 80M

1. Eligibility for Deduction:
Domestic companies that receive dividends from other domestic companies, foreign companies, or business trusts can claim a deduction under Section 80M. The deduction is available irrespective of whether the company falls under the old or new tax regimes.

2. Deduction Limit:
There is no cap on the amount of dividend eligible for deduction under Section 80M. The entire amount of inter-corporate dividend received by a domestic company is eligible for deduction, provided the dividend is received within the specified timeframe. This is a major relief for corporate entities, as it reduces their overall tax liability.

3. Dividend Distribution Requirement:
To qualify for the deduction, the domestic company must distribute the dividend it has received within one month before the due date for filing its income tax return. This ensures that the dividend income is appropriately utilised and not hoarded within the company.

4. Timeframe for Applicability:
The provisions of Section 80M are applicable to dividends received on or after April 1, 2020, with the tax benefit available for the assessment year 2021-22 and onwards. This provision is an important step in making the taxation system more transparent and easier to comply with for businesses.
 

How Section 80M Helps Businesses

1. Reduction in Tax Liability:
One of the key advantages of Section 80M is that it allows companies to reduce their taxable income by deducting the dividends received. This deduction is especially beneficial for holding companies that receive significant dividend income from their subsidiaries. With this provision in place, companies can lower their overall tax liability, contributing to better financial performance and more efficient tax planning.

2. Avoiding Double Taxation:
Previously, under the Dividend Distribution Tax (DDT) system, dividends were taxed at the company level before being distributed to shareholders, and then again when received by shareholders. This led to double taxation. Section 80M seeks to resolve this issue by eliminating double taxation of inter-corporate dividends. The deduction ensures that the income is only taxed once, at the recipient company’s tax rate.

3. Encouraging Corporate Group Investment:
Section 80M also incentivises companies to invest within their corporate group, especially in subsidiaries. By providing a tax deduction on the dividends received from subsidiaries, this provision encourages the efficient allocation of capital within corporate groups. It helps enhance the overall growth and financial stability of the group.

4. Support for Small and Medium Enterprises (SMEs):
For small and medium enterprises (SMEs) operating within a group structure, Section 80M proves to be a valuable tool. It helps these companies optimise their tax positions by allowing them to receive dividends from subsidiaries without facing significant tax liabilities. This can improve their cash flows and allow them to reinvest in their business or distribute more dividends to their shareholders.
 

Conditions for Claiming the Deduction

To claim the deduction under Section 80M, a domestic company must fulfil the following conditions:

• The company must hold more than 50% of the voting power in the subsidiary company from which the dividend is received.
• The dividend must be part of the company’s total income.
• The domestic company must not be a company in which the public has substantial interest (i.e., listed companies with widely held shareholding structures).
• The dividend must be received from a subsidiary company that has paid tax on its profits.
• The domestic company must furnish a declaration to the subsidiary company, stating that it satisfies all the conditions laid out under Section 80M.
   

Impact of Section 80M

1. Shift in Tax Burden:
Section 80M marks a shift in the taxation of dividends from the payer company (the company declaring the dividend) to the recipient company (the company receiving the dividend). This change allows the tax burden to be aligned with the actual recipient’s tax bracket, thus providing more fair taxation.

2. Simplified Tax Compliance:
The provision also simplifies tax compliance for businesses. With the removal of DDT, companies now have to report dividend income in their returns, but they can also claim deductions for any dividends received. This makes the process more straightforward and reduces the compliance burden.

3. Beneficial for Corporate Structures:
For corporate groups with holding-subsidiary relationships, Section 80M enables better capital management and efficient tax planning. The ability to receive tax-free dividends from subsidiaries helps holding companies reinvest these funds into other parts of their business or distribute them to their shareholders as needed.
 

Conclusion

Section 80M is a valuable provision for domestic companies in India, offering a much-needed deduction on inter-corporate dividends. It simplifies tax administration, helps avoid double taxation, and promotes investment within corporate groups. With no cap on the deduction and a clear structure for claiming the benefit, Section 80M serves as an effective tool for businesses to manage their tax liabilities while fostering growth.

As the corporate landscape continues to evolve, provisions like Section 80M play a crucial role in making the tax system more efficient and business-friendly.