New Income Tax: No Deduction for Inter-Corporate Dividends Under Section 80M?

New Income Tax: No Deduction for Inter-Corporate Dividends Under Section 80M

The Income Tax Bill 2025 has introduced several significant changes in tax laws, one of the most crucial being the elimination of the Section 80M deduction for inter-corporate dividends. This move is expected to have a major impact on corporate taxation, dividend distribution strategies, and overall financial planning for companies operating in India. In this article, we explore the implications of this change and what it means for businesses.

Understanding Section 80M

Section 80M of the Income Tax Act was introduced to eliminate double taxation on dividends received by domestic companies from other domestic companies. Under the previous tax regime:

• A domestic company receiving dividends from another domestic company could claim a deduction under Section 80M for the amount of dividend distributed to its shareholders within a specified time.
• This ensured that dividends were not taxed twice—once when received by a company and again when distributed to its shareholders.
• The provision helped corporate groups optimize tax liabilities and encourage efficient capital allocation.

What Has Changed Under the New Tax Bill?

With the elimination of Section 80M, inter-corporate dividends will now be fully taxable. The new framework implies:

1. No Deduction for Dividends Received: Companies receiving dividends from another company will have to pay tax on the entire dividend amount.
2. Taxation at Both Levels: When the same dividend is further distributed to shareholders, it will be subject to tax again at the shareholder level, leading to double taxation.
3. Impact on Holding Companies: Holding companies, which typically receive dividends from subsidiaries and then distribute them to investors, will face higher tax liabilities.
4. Increase in Effective Tax Rates: The removal of 80M results in a higher overall corporate tax burden, reducing net profits for dividend-receiving companies.

Impact on Corporate Entities

1. Holding Companies and Business Groups

Many large conglomerates and corporate groups operate holding companies that primarily receive dividends from subsidiaries. With Section 80M gone, these holding structures may need to be re-evaluated to minimize tax inefficiencies.

2. Investment Companies and Financial Institutions

Investment firms, mutual funds, and financial entities that rely on dividends as a key income source will also face increased taxation, reducing post-tax yields.

3. Impact on Dividend Policies

• Companies may reduce dividend payouts and prefer retaining earnings or exploring buybacks as an alternative.
• Firms might restructure shareholding patterns to mitigate tax liabilities.
• Investors may demand higher pre-tax dividends to compensate for increased tax burdens.

4. Effect on Foreign Investments

The removal of inter-corporate dividend deduction may discourage foreign companies from setting up subsidiaries in India due to increased tax inefficiencies.

Possible Alternatives for Businesses

Companies may explore several strategies to mitigate the tax impact:

• Internal Restructuring: Merging subsidiaries with holding companies to eliminate inter-corporate dividend flows.
• Buyback of Shares: Instead of dividends, companies may opt for share buybacks, which are taxed differently.
• Profit Retention and Reinvestment: Businesses may retain earnings rather than distributing dividends.
• Using LLP Structures: Limited Liability Partnerships (LLPs) may be considered as an alternative to traditional corporate structures.