1051. Instructions for deduction of tax at source from dividends payable/paid by domestic company to foreign companies after May 28, 1971 at the rate of 24.5 per cent specified in Part II of First Schedule to Finance (No. 2) Act, 1971
Circular No. 61 was issued by the Central Board of Direct Taxes on 19 June 1971. Its subject is 1051. Instructions for deduction of tax at source from dividends payable/paid by domestic company to foreign companies after May 28, 1971 at the rate of 24.5 per cent specified in Part II of First Schedule to Finance (No. 2) Act, 1971.
Raises to 24.5 per cent, uniformly, the rate of deduction from dividends paid by a domestic company to a foreign company on or after 28 May 1971. The Finance (No. 2) Bill, 1971 proposed to withdraw the higher section 80M deduction of 80 per cent that a foreign company enjoyed on dividends from a closely-held Indian company mainly engaged in a priority industry, leaving 65 per cent in every case, so the effective incidence on such dividends moves from 14 per cent to 24.5 per cent. Item 2(b) of Part II of the First Schedule was modified to match, and the deduction rate on those priority industry dividends goes up from 14 per cent to 24.5 per cent. For dividends paid between 1 April and 28 May 1971 tax would have been deducted at only 14 per cent under the rate continued by the earlier Finance Act, 1971; where the remittance has already gone, the shortfall is to be made good in the assessment for 1972-73 so far as possible, and where it has not, the Reserve Bank will insist on the shortfall being made up before authorising remittance.
The intention was to collect the full tax due on dividends payable to a foreign company at the deduction stage, so that no further amount need be collected on assessment in the following year.
| Under the 1961 Act | Now |
|---|---|
| s.80M | s.148 |
1051. Instructions for deduction of tax at source from dividends payable/paid by domestic company to foreign companies after May 28, 1971 at the rate of 24.5 per cent specified in Part II of First Schedule to Finance (No. 2) Act, 1971
1. I am directed to say that in the Finance (No. 2) Bill, 1971, introduced in Parliament on May 28, 1971, it has been proposed to amend the provisions in section 80M. Under the scheme of the said provisions, inter-corporate dividends are subjected to tax at a concessional rate, by allowing a deduction of a specified percentage of the dividends in computing the taxable income of the company receiving the dividends and taxing the remainder at the rates of tax applicable to the ordinary income of the company. Prior to the introduction of the Bill, a foreign company receiving dividends from a domestic company was entitled to a deduction in respect of such dividends from its taxable income at the following rates :(i)
where the company paying the dividends is a closely-held Indian company mainly engaged
in a priority industry
80 per cent
(ii)
in any other case
65 per cent.
In view of the concessional treatment as mentioned above, the incidence of tax on the aforesaid dividends is worked out as under :
Dividend
Deduction
Net
Rate of tax on
Effective rate on
income, say
u/s 80M
dividend
ordinary income
the whole of the dividend
Rs.
per cent
per cent
per cent
per cent
In the case
100
80
20
70
14
of Sl. No. ( i)
above
In the case
100
65
35
70
24.5
of Sl. No. ( ii)
above
2. It has now been proposed in the Bill to do away with the concessional treatment granted to the foreign companies on their dividend income from closely-held Indian companies mainly engaged in a priority industry. In such cases, therefore, the deduction admissible under section 80M would be 65 per cent as against the existing rate of 80 per cent. In view of this amendment, the effective incidence of tax on dividends received by a foreign company from any domestic company will henceforth be 24.5 per cent.
3. Prior to the introduction of the Finance (No. 2) Bill, 1971, the rate for deduction of tax at source from dividends received by a foreign company from a closely-held Indian company mainly engaged in a priority industry was 14 per cent. As a corollary to the amendment proposed in section 80M, necessary modification has also been made in item 2(b) of Part II of the First Schedule to the said Bill with the result that the rate for deduction of tax in respect of dividends paid by any domestic company to a foreign company will now uniformly be 24.5 per cent. As it is intended to secure collection of the full amount of tax due on the dividends payable to a foreign company (thereby obviating the need for collecting a further amount on assessment in the subsequent year), it is requested that deduction of tax at source may be made at the revised rates in respect of all such dividends payable/paid after May 28, 1971. In regard to payments of dividends during the period from April 1 to May 28, 1971, tax would have been deducted at source only at the rate of 14 per cent prescribed last year and continued in force by the earlier Finance Act, 1971. Where the remittance of such dividends has already been made, the deficiency has to be made good in the assessment for the year 1972-73, to the extent possible. Where, however, the remittance of dividends has not so far been made, the Reserve Bank will insist on the shortfall in the tax deduction being made up before authorising remittance. As regards dividend payments to be made after May 28, 1971, the Reserve Bank would, no doubt, ensure that tax is deducted at the rate of 24.5 per cent and only the balance is allowed to be remitted.
Circular : No. 61 [F. No. 275/37/71-ITJ], dated 19-6-1971.
A company's 1971-72 dividend remittance file, and the short deduction picked up in its assessment for 1972-73.
A domestic company in a priority industry declares a dividend of Rs. 1,00,000 to its foreign parent and pays it in July 1971. It deducts Rs. 24,500 instead of the Rs. 14,000 that the old rate would have required, and remits the balance.
Source: the Income Tax Department’s own published text — its page for this instrument.
