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Withdrawal of Special Tax Rate on Dividend Under Section 115BBD

withdrawal-of-special-tax-rate-on-dividend-under-section-115bbd

Finance Bill, 2022 has withdrawn the concessional rate of taxation on dividend income under section 115BBD of the Income-tax Act, 1961 (‘Act’) from the Assessment Year 2023-24.


Background of the Provisions of Section 115BBD


Section 115BBD was inserted in the Act by the Finance Act, 2011 to provide that where total income of an Indian company for the previous year relevant to the assessment year 2012-13 includes any income by way of dividends received from a foreign company in which the said Indian company holds 26 % or more in nominal value of equity shares, then such dividends shall be taxable at the rate of 15% (plus applicable surcharge and cess) on the gross amount of dividends. No expenditure in respect of such dividends shall be allowed under the Act.



Proposed Amendment to section 115BBA


It is proposed to amend section 115BBD of the Act to provide that the provisions of this section shall not apply to any assessment year beginning on or after the 1st day of April, 2023.


Clause 27 of the Finance Bill, 2022 proposes to amend section 115BBD of the Act as follows.


Amendment of section 115BBD.


27. In section 115BBD of the Income-tax Act, after sub￾section (3), the following sub-section shall be inserted with effect from the 1st day of April, 2023, namely:–


“(4) The provisions of this section shall not apply to any assessment year beginning on or after the 1st day of April, 2023.”. 


Explaining the Provisions of section 115BBD


Clause 27 seeks to amend section 115BBD of the Act relating to tax on certain dividends received from foreign companies. 


The said section, inter-alia, provides that in case of an Indian company whose total income includes any income by way of dividends declared, distributed or paid by a foreign company, in which the said Indian company holds twenty-six per cent. or more in nominal value of the equity share capital, such dividend income shall be taxed at the rate of fifteen per cent. 


It is proposed to insert a new sub-section (4) to provide that the provisions of this section shall not apply to any assessment year beginning on or after the 1st day of April, 2023. 



This amendment will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years. 


Stated Rationale for the proposed amendment in section 115BBD


The rate of tax under section 115BBD was aligned to section 115-O which provided for Dividend Distribution Tax.


Finance Act, 2020 abolished the dividend distribution tax provided in section 115-O to, inter-alia, provide that dividend shall be taxed in the hands of the shareholder at applicable rates plus surcharge and cess.


In order to provide parity in the tax treatment in case of dividends received by Indian companies from specified foreign companies vis a vis dividends received from domestic companies, it is proposed to amend section 115BBD of the Act to provide that the provisions of this section shall not apply to any assessment year beginning on or after the 1st day of April, 2023.


Concluding Remarks


Once the provisions of section 115BBD are withdrawn, the dividend received from specified foreign companies shall also be taxable at the normal rates of tax.


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