Industry & Economy
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Budget
Corporate
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Dividend Announcement
Less outgo for parent companies
A smooth ride.
Vidya Bala
Infrastructure, power and financial services companies are likely to be among the key beneficiaries of the budget proposal to avoid double taxation of dividend income received by a parent company from its subsidiaries. These companies route many of their new as well as strategic business forays through subsidiaries, making the latter a key source of earnings.
Dividend income declared by subsidiaries currently suffers dividend distribution tax. Once this is distributed to the parent, the dividend, again classified as ‘other income’ in the parent’s books, suffers corporate tax in the hands of the holding company.
In order to enable companies to efficiently structure their business, the Budget has amended the Income Tax provision under Section 115-O to allow a parent company to set off dividend received from its subsidiary company against the dividend distributed by itself. This is subject to the conditions that the dividend distributed by the subsidiary has suffered dividend distribution tax and the parent company is not a subsidiary of any other company.
It is to be noted that only dividend income received from subsidiaries (and not dividend income on investments) would be eligible for this set-off provision.
A number of power and infrastructure companies operate through subsidiaries and special purpose vehicles to enable independent financing of projects, to contain the burden on the parent’s balance sheet.
Companies such as IRB Infrastructure Developers, Nagarjuna Construction, GMR Infrastructure and GVK Power & Infrastructure are some companies in this sector that typically operate different classes of projects through subsidiaries/special purpose vehicles.
Similarly, financial services companies such as Motilal Oswal Financial Services, Edelweiss Capital and Religare Enterprises route their key broking business as well as other businesses — such as wealth management, portfolio management, mutual funds and insurance — through a web of subsidiaries.
For these companies, the businesses housed in these subsidiaries are at a nascent stage. However, given that the income and earnings prospects of these companies rely substantially on how the subsidiaries fare, the parent companies are likely to benefit from this removal of double taxation on dividends received, once these businesses start generating significant income.
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