1. Overview
Section 115BBD provided a concessional tax rate of 15% (plus surcharge and cess) on dividends received by Indian companies from specified foreign companies where the Indian company held ≥26% equity shares. Introduced in 2011 to promote foreign investments, this provision was withdrawn effective April 1, 2023 (AY 2023–24) to align tax treatment with domestic dividends.
2. Key Provisions (Before Withdrawal)
- Applicability:
- Only for Indian companiesreceiving dividends from foreign subsidiaries with ≥26% equity ownership.
- Excluded dividends from foreign companies with <26% holdings or non-equity instruments.
- Tax Calculation:
- 15% on gross dividend income(no deductions for expenses).
- Effective Rate: ~17.22% (including 10% surcharge + 4% cess for high-income companies).
- Non-Applicability:
- Dividends taxed under other heads (e.g., business income).
- Withdrawn from AY 2023–24.
3. Post-Withdrawal Regime (From AY 2023–24)
- Dividends now taxed at normal corporate rates(22%/30% for domestic companies, 40% for foreign companies).
- Key Changes:
- Section 80M Deduction: Companies can claim deductions if dividends are redistributed to shareholders within specified timelines.
- Foreign Tax Credit (FTC): Available under DTAA for taxes paid abroad.
- Expense Claims: Interest expenses up to 20% deductible if taxed as “income from other sources”.
4. Illustrative Example
- Scenario (Pre-2023):
- An Indian company (holding 30% in a German firm) receives ₹3 crore dividends.
- Tax: 15% of ₹3 crore = ₹45 lakh (+ surcharge/cess).
- Post-2023:
- Same dividend taxed at 22% (if opting for concessional regime) = ₹66 lakh (+ surcharge/cess).
5. Rationale for Withdrawal
- Parity: Align tax treatment of foreign and domestic dividends.
- Simplification: Post-abolition of Dividend Distribution Tax (DDT) in 2020, dividends are taxed at shareholder level.
6. Compliance & Planning Tips
- Pre-2023 Dividends: Assess FTC claims under DTAA (e.g., India-Singapore DTAA allows underlying tax credits).
- Post-2023:
- Redistribute dividends to shareholders to avail Section 80M deductions.
- Maintain documentation for FTC claims
