Exemption of deduction of tax at source on payment of Dividend to business trust in whose hand dividend is exempt
Section 194 of the Act provides for deduction of tax at source (TDS) on payment of dividends to a resident. The second proviso to this section provides that the provisions of this section shall not apply to such income credited or paid to certain insurance companies or insurers. It is proposed to amend second proviso to section 194 of the Act to further provide that the provisions of this section shall also not apply to such income credited or paid to a business trust by a special purpose vehicle or payment of dividend to any other person as may be notified.
This amendment will take effect retrospectively from 1st April, 2020.
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In terms of the InvIT Regulations and the REIT Regulations, an InvIT or a REIT is permitted to have a multi-level holding structure, being one where the business trust holds shares in the SPV through a holding company (“ Multi-level Structure ”). It would be relevant to note that the erstwhile Section 115-O of the Income-tax Act did not exempt a Multi-level structure from the applicability of DDT. Accordingly, dividend paid by an SPV to its holding company was subject to DDT at an effective rate of 20.56% (inclusive of surcharge and cess). The Bill which abolished Section 115-O of the Income-tax Act, had proposed to reintroduce Section 80-M in the Income-tax Act. This section provides for a deduction for dividends received by one domestic company from another domestic company, limited to the amount of dividend received from the investee company if the shareholder company pays dividend before the specified due date. Thus, under the provisions of the Bill, the holding company would be able to claim deduction for the dividends received from the SPV, resulting in avoidance of double tax on dividends. The Finance Act, in addition to confirming the aforementioned proposals, has further extended the deduction under Section 80-M of the Income-tax Act to dividends received from business trusts and foreign companies. Accordingly, as per the new provisions, a unitholder of the business trust which is a domestic company, may claim a deduction for the dividends received by it from a business trust, subject to conditions provided under Section 80-M of the Income-tax Act.