Introduction
Section 115BBD of the Income Tax Act was introduced to incentivize Indian companies to repatriate dividends earned from foreign subsidiaries. The provision allowed for a concessional tax rate of 15% on dividends received from specified foreign companies, ensuring that such income was taxed at a lower rate compared to other corporate income. However, recent amendments have withdrawn this benefit, aligning the tax treatment of foreign dividends with domestic dividends.
This blog explores the provisions of Section 115BBD, its applicability, historical amendments, and the implications of its withdrawal effective from April 1, 2023.
Key Features of Section 115BBD
- Concessional Tax Rate
Under Section 115BBD, dividends received by an Indian company from a specified foreign company were taxed at a special concessional rate of 15% (plus applicable surcharge and cess). This was significantly lower than the normal corporate tax rate, offering tax savings on repatriated foreign income. - Specified Foreign Company
For the purposes of Section 115BBD, a “specified foreign company” refers to a foreign company in which the Indian company holds at least 26% of the nominal value of the equity share capital. This threshold was set to ensure that the concessional tax rate applied only to substantial holdings in foreign companies. - No Deductions Allowed
One of the significant aspects of Section 115BBD is that no deductions or allowances could be claimed against the dividend income. This means that the dividend income was taxed on a gross basis without any reductions for expenses.
Amendments and Historical Background
1. Introduction by Finance Act, 2011
The provision was first introduced by the Finance Act, 2011, effective from April 1, 2012, applicable for the assessment year 2012-13. The aim was to encourage Indian companies to bring back earnings from foreign investments by offering a lower tax rate on such income.
2. Subsequent Amendments
Over the years, the applicability of Section 115BBD was extended through amendments by various Finance Acts:
- Finance Act, 2013: Extended the benefit for the assessment year 2013-14.
- Finance Act, 2014: Further extended it to the assessment year 2014-15.
- Finance Act, 2015 and onwards: Made the provision applicable to all subsequent years, continuing the concessional tax treatment on foreign dividends without limiting it to specific assessment years.
3. Withdrawal by Finance Act, 2022
The Finance Act, 2022, marked a significant shift in the tax treatment of foreign dividends. It withdrew the applicability of Section 115BBD from April 1, 2023, onwards. The amendment was made to bring parity between the tax treatment of dividends received from foreign and domestic companies.
Applicability and Scope
- Assessment Years Covered
The provisions of Section 115BBD were applicable from the assessment year 2012-13 to the assessment year 2022-23. From the assessment year 2023-24 onwards, this concessional tax rate is no longer available, and dividends from foreign companies are now taxed under the normal corporate tax provisions. - Calculation of Tax under Section 115BBD
The tax payable under Section 115BBD was calculated as the aggregate of:- 15% Tax on Dividend Income: Tax was levied at 15% on the gross amount of dividends received from the specified foreign company.
- Tax on the Remaining Total Income: The rest of the company’s total income, excluding the dividend income, was taxed according to the standard corporate tax rates.
- Illustration of Tax Calculation
Suppose an Indian company had a total income of ₹8,50,000, including ₹2,50,000 as dividends received from a foreign company where it held a 35% equity stake:- The tax on ₹2,50,000 would be calculated at 15% (under Section 115BBD).
- The remaining ₹6,00,000 would be taxed as per the standard corporate tax rate applicable to the company.
Cess and Surcharge Applicability
In addition to the basic tax calculated under Section 115BBD, surcharge and cess were applicable as follows:
- Education Cess and Secondary & Higher Education Cess (up to AY 2018-19)
- Education cess was 2% of the income tax and surcharge, while secondary and higher education cess was 1%.
- Health and Education Cess (from AY 2019-20 onwards)
- For assessment years from 2019-20, a 4% health and education cess was levied on the income tax and surcharge.
Impact of the Withdrawal of Section 115BBD
- Alignment with Domestic Dividends
With the withdrawal of the concessional tax rate under Section 115BBD from April 1, 2023, the tax treatment for dividends received from foreign companies has been aligned with that of domestic companies. Both types of dividend income are now taxed at the regular corporate tax rates applicable to the Indian company. - Implications for Indian Companies
The removal of the concessional rate may increase the tax burden on Indian companies with significant foreign investments. However, it also brings consistency in the tax treatment of dividends and simplifies the tax regime. - Repatriation Decisions
Companies may need to revisit their strategies for repatriating profits from foreign subsidiaries in light of the increased tax rates.
Frequently Asked Questions (FAQs)
1. What was the tax rate under Section 115BBD?
The tax rate on dividends received from specified foreign companies was 15% (plus applicable surcharge and cess).
2. What is a specified foreign company under Section 115BBD?
A specified foreign company refers to a foreign company in which the Indian company holds at least 26% of the nominal value of equity share capital.
3. Is Section 115BBD still applicable?
No, Section 115BBD is not applicable for assessment years beginning on or after April 1, 2023. The concessional tax rate on foreign dividends has been withdrawn.
4. How were surcharge and cess applied under Section 115BBD?
Surcharge and cess were applied on the tax calculated under Section 115BBD as per the rates in force for each assessment year.
5. Why was Section 115BBD withdrawn?
The withdrawal was aimed at aligning the tax treatment of foreign dividends with that of domestic dividends to ensure parity in dividend taxation.
For more information on the latest tax amendments, visit SmartTaxSaver.
Conclusion
Section 115BBD of the Income Tax Act served as a valuable tax incentive for Indian companies with foreign subsidiaries, offering a lower tax rate on repatriated dividend income. Its introduction aimed to encourage companies to bring back foreign earnings and boost domestic liquidity. However, the withdrawal of this provision aligns the tax treatment of foreign dividends with domestic ones, ensuring uniformity in dividend taxation.
While this change may increase the tax burden for some companies, it also simplifies the overall tax regime. Companies with foreign investments should reassess their dividend repatriation strategies and explore alternative ways to manage their tax liabilities effectively.
