Introduction
Section 115BBD of the Income Tax Act, 1961 was introduced by the Finance Act, 2020, and is applicable from the assessment year 2021-22 onwards. This provision is aimed at promoting foreign investment by providing a concessional tax rate to Indian companies that receive dividend income from specified foreign companies. The concessional tax rate of 15% is significantly lower than the regular tax rate, which ranges from 25% to 40%, depending on the income bracket of the Indian company.
Applicability of Section 115BBD
The concessional tax rate of 15% under Section 115BBD of the Income Tax Act, 1961 applies only to dividend income received by an Indian company from a specified foreign company. A designated foreign firm is one in which the Indian business owns at least 26% of the nominal value of equity shares. The clause does not apply to dividend income obtained from foreign corporations in which India owns less than 26% of the notional value of the equity shares.
Non-Applicability of Section115BBD
Section 115BBD of the Income Tax Act, 1961 will not be applicable to the assessment year that begins from April 1st, 2023 (i.e., Assessment Year – 2023-24). Since the tax rate for dividends received from foreign companies is at a concessional rate of 15% (for an Indian company that holds 26% of the shares in the company). But the rate for dividends received from a domestic company is taxed at a normal rate. Therefore, this scheme was withdrawn to ensure equality in the treatment of the dividend income received.
Calculation of Tax Liability under Section 115BBD
The tax liability under Section 115BBD of the Income Tax Act, 1961, is calculated at a concessional rate of 15% on the gross dividend income received by the Indian company from the specified foreign company. The concessional rate of 15% is significantly lower than the regular tax rate applicable to dividend income.
However, it is essential to note that the concessional tax rate of 15% under Section 115BBD of the Income Tax Act, 1961, is exclusive of surcharge and cess. Therefore, the effective tax rate for an Indian company receiving dividend income from a specified foreign company would be higher than 15%, as a surcharge and cess would be levied on the concessional tax rate of 15%.
Illustration of Tax Liability under Section 115BBD
Let us understand the calculation of tax liability under Section 115BBD of the Income Tax Act, 1961, through an illustration. Suppose an Indian company, ABC Ltd., holds 30% of the nominal value of equity shares in a specified foreign company, XYZ Inc. In the financial year 2022-23, XYZ Inc. declares a dividend of Rs. 10 crores, out of which ABC Ltd. receives a dividend of Rs. 3 crores.
Under Section 115BBD of the Income Tax Act, 1961, ABC Ltd.’s tax liability on the dividend income received from XYZ Inc. would be calculated as follows:
Gross Dividend Income: Rs. 3 crores
Concessional Tax Rate: 15%
Tax Liability: 15% of Rs. 3 crores = Rs. 45 lakhs
Effective Tax Rate under Section 115BBD
As mentioned earlier, the concessional tax rate of 15% under Section 115BBD of the Income Tax Act, 1961, is exclusive of surcharge and cess. Therefore, the effective tax rate for an Indian company receiving dividend income from a specified foreign company would be higher than 15%, as a surcharge and cess would be levied on the concessional tax rate of 15%.
The effective tax rate under Section 115BBD would vary depending on the income bracket of the Indian company. For instance, if the Indian company falls under the highest income bracket of 40%, the effective tax rate under Section 115BBD would be 17.22% (15% + 10% surcharge + 4% cess).
Impact of Section 115BBD on Foreign Investment in India
Section 115BBD of the Income Tax Act, 1961, is expected to have a positive impact on foreign investment in India. The provision provides a concessional tax rate to Indian companies that hold a substantial stake in a foreign company, thereby incentivizing them to invest in foreign companies. This, in turn, would lead to increased foreign investment in India and promote the growth of the Indian economy.
However, it is essential to note that the provision applies only to specified foreign companies in which the Indian company holds 26% or more in the nominal value of equity shares. Therefore, Indian companies with smaller stakes in foreign companies may not be able to avail of the concessional tax rate under Section 115BBD.
Conclusion
Section 115BBD of the Income Tax Act of 1961 allows for a 15% tax concession on dividend income received by an Indian business from a designated foreign firm in which the Indian company owns 26% or more of the notional value of equity shares. Though, this provision has now been withdrawn from the assessment year beginning from April 1, 2023, due to the difference in tax rates of foreign and domestic companies.
