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Companies with subsidiaries are not going to get relief from double taxation on dividend that the finance minister announced in the Budget. Exemption from the 12.5% dividend distribution tax (DDT), already levied at a subsidiary level, will not benefit many entities that have holding company status legally by virtue of their boardroom control of the subsidiary.

As per the Company Law, a company can be a holding company if it can nominate a majority of directors in a company. Such companies will not be treated on a par with those having holding company status by virtue of their more than 50% equity ownership in another company. The finance bill recognises only the second category for exemption from DDT, which is now levied twice — first when subsidiary declares dividend to the parent and when the parent distributes it to its shareholders. Many companies that have 49% stake in a JV, but still have boardroom control, will not get this benefit.

“When the government has accepted the rationale to remove double taxation on dividend, it should have extended the benefit to all types of holding companies,” said ICAI president Ved Jain.

“If not to the same extent, the 49% JV partner should have got a proportional exemption from the tax,” said ICSI former president Priti Malhotra. The benefit is restricted to one level of parent-subsidiary ladder. “Multi-level subsidiaries are key to a corporate’s financial restructuring and engineering and, therefore, should be eligible for exemption,” said Ms Malhotra.

The government recognises unlimited number of parent-subsidiary network as an acceptable business structure, with even the proposed new company law not recommending any cap on the number of subsidiaries a company can have. This is despite the fact that an earlier joint parliamentary panel that investigated into a stock market scam recommended a cap on the number of subsidiaries a company can have.

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