The plan will impact foreign investors, including private equity investors, who had invested from countries with whom India has a beneficial tax treaty such as Singapore and Mauritius and were using buyback as a way to repatriate surplus from Indian businesses without paying taxes. Photo: Mint (Mint)
The plan will impact foreign investors, including private equity investors, who had invested from countries with whom India has a beneficial tax treaty such as Singapore and Mauritius and were using buyback as a way to repatriate surplus from Indian businesses without paying taxes. Photo: Mint
(Mint)

Proposal of levying withholding tax of 20%

Govt proposes levying a withholding tax of 20% on profits distributed by unlisted firms to shareholders through buyback of shares

New Delhi: In a setback to foreign investors who buy shares of privately held companies and use the buyback route for repatriation of funds, finance minister P. Chidambaram proposed levying a withholding tax of 20% on profits distributed by unlisted companies to shareholders through buyback of shares.

“Some tax avoidance arrangements have come to notice, and I propose to plug the loopholes. Some unlisted companies have avoided dividend distribution tax by arrangements involving buyback of shares. I propose to levy a final withholding tax at the rate of 20% on profits distributed by unlisted companies to shareholders through buyback of shares," Chidambaram said in his budget speech.

This will impact foreign investors, including private equity investors, who had invested from countries with whom India has a beneficial tax treaty such as Singapore and Mauritius and were using buyback as a way to repatriate surplus from Indian businesses without paying taxes. Buyback was treated as capital gains tax in the foreign country and hence shareholders could get away with paying zero or a very low rate of tax.

But with the reclassification of buybacks as dividends, there will be a significant tax on investors since now companies will have to pay tax akin to a dividend distribution tax at 20%.

“This amendment will discourage adoption of selective buybacks as a means of distributing surplus to foreign investors. Also, since the tax is on the distributing company, it will impact the ability of the shareholder to claim credit in the home country," said Prerna Mehndiratta, a director at BMR Advisors.

Close