Section 115BBD vs Section 115O- Impact of Interim Finance Act 2014.

Section 115BBD vs Section 115O- Impact of Interim Finance Act 2014.

1.       U/s 115BBD Parent Domestic Company is required to pay tax of 15% on dividend income received from foreign subsidiary, provided dividend is received in FY 13-14. The said dividend is taxable on Gross basis, without allowing any deduction for expenses.

2.       The said benefit has not been extended in interim Finance Act, 2014 , as a result dividend received from foreign subsidiary  in FY 14-15 will be chargeable to tax @ 30% on net basis.

3.       Section 115O, provides that in computing the Dividend Distribution Tax (DDT) on dividend declared by Domestic company, the following amount shall be deducted from said dividend:-

a)      Amount of dividend received from domestic subsidiary company, on which subsidiary company has paid DDT.

b)      Amount of dividend received from Foreign subsidiary company, on which recipient company has paid tax u/s 115BBD

4.       Section 115BBD will become non-operational w.e.f 1/4/2014. Now question for consideration is

·         Whether parent company which will received dividend from  foreign subsidiary in FY 14-15, on which parent co will pay tax @ 30%, can claim deduction of such dividend while calculating DDT on dividend which will be declared by it (Parent)

5.       On plain reading of section 115O, it appears that benefit of reduction of dividend received from Foreign subsidiary will not be available to parent company from 1/4/2014.

6.       On logical reasoning and intention behind the beneficial provision of section 115O, one can claim the benefit of deduction of dividend from foreign subsidiary on following grounds:-

a)      Domestic subsidiary is required to pay 15% DDT on dividend declared by it. Parent company is entitled to reduce the said dividend while calculating DDT on dividend declared by it.

b)      Present section 115BBD requires parent company to pay 15% tax on dividend from foreign subsidiary, before parent company can claim the deduction of  said dividend while calculating the dividend declared by it

c)       Now on section 155BBD becoming non-operational from 1/4/2014, Parent company will be required to pay 30% tax on dividend received from foreign subsidiary. When present law is allowing benefit u/s 115O on payment if 15% tax on foreign dividend,  the said benefit should be continue on payment of tax  of 30% on foreign dividend.

7.       However if reasoning given at point 6 above is accepted, there will be practical difficulties in implementing section 115O, explained as under:-

a)      U/s 115BBD, tax on dividend is required to be paid @ 15% on gross basis without allowing any deduction for expenses

b)      In the absence of section 115BBD, tax on dividend will be paid @ 30%, net of expenses

c)       Considered a case, where parent company incurred expense of Rs. 50,000 in earning dividend of Rs. 60,000 from subsidiary company.

d)      Parent company will pay tax of 30% of net dividend of Rs. 10,000 (60,000-50,000)

e)      Question for consideration is how amount of such dividend shall be deducted by parent company while calculating DDT on dividend declared by it i.e Rs. 60,000 or Rs. 10,000

Hope that Final Finance Act, 2014 will definitely throw clarity on these aspects