Two key direct tax changes from Finance Bill 2022
Premium- The Budget has sought to cap the surcharge levied on such AOPs (which comprises only companies) to 15%
NEW DELHI : The Finance Bill has introduced two key changes in direct taxes as part rationalising tax rates covering associations of persons and dividend received by companies. Here are the details:
Association of Persons
As a standard market practice, various works contracts compulsorily require individual companies to form a consortium, which is treated as an Associations of person (AOP). These entities are subject to graded surcharge ranging up to 37%, which is significantly higher than that levied on individual companies. In order to provide a level playing field, the Budget has sought to cap the surcharge levied on such AOPs (which comprises only companies) to 15%, said an analysis shared by law firm Cyril Amarchand Mangaldas.
Reduced tax rate on foreign company dividend
At present, tax laws provide that dividends received by domestic companies, holding more than 26% of shares in a foreign company would be taxed at a reduced rate of 15%. This beneficial rate was aligned with the erstwhile dividend distribution tax (DDT) of 15%, which was payable on dividends distributed by the domestic companies.
With the DDT regime having been abolished by Finance Act 2020 the dividends distributed by Indian companies to its parent company is subject to tax at the applicable corporate tax rates ranging up to 30%, while dividend received from foreign companies is still subject to tax at the special rate of 15%, explained the analysis. In order to restore the parity between the tax rates applicable to dividends received by Indian holding companies from its foreign companies vis-a-vis domestic companies, the Finance Bill 2022 has proposed to withdraw this beneficial regime, said the analysis from Cyril Amarchand Mangaldas.
The Finance Bill will be cleared in the current session of Parliament after which the amendments will take effect.
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