India to tax buyback exits by foreign investors

"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," Finance Minister Palaniappan Chidambaram said in his budget statement.

Chidambaram also wants to close a loophole whereby profits are distributed by Indian subsidiaries to foreign parent companies through royalties. This is done because royalties are subject to a lower tax rate under India's Income Tax Act than the rates offered through double tax treaties.

Chidambaram proposes increasing the tax on royalty and fees for technical services to non-residents from 10% to 25%.

The finance minister touched on the controversial general anti-avoidance rules (GAAR), proposed in the 2012 budget, that are intended to prevent investors using treaty jurisdictions purely for the tax benefits offered by "looking through" structures that are deemed to lack commercial substance.

A high-level committee was appointed to review the situation and it recommended that GAAR be postponed for three years to allow time for tax officials to be trained and that, when the measures are introduced, they shouldn't apply to existing investments. These recommendations were endorsed by the government and Chidambaram wants to incorporate them into the Income Tax Act from April 2013.

"The modified provisions preserve the basic thrust and purpose of GAAR. Impermissible tax avoidance arrangements will be subjected to tax after a determination is made through a well laid out procedure involving an assessing officer and an approving panel headed by a judge," he said.

The budget also included a raft of measures designed to support start-ups. Tax breaks will be awarded to angel investor groups, the Small Industrial Development Bank of India will see its refinancing capability doubled and more capital will be pumped into its India Microfinance Equity Fund, and it will be made easier for young companies to list on the country's SME bourses.

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• Topics
• South Asia
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• Exits
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• India
• tax
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