Current tax regime
The buy-back of shares in India historically has been considered to be a transaction subject to capital gains treatment, and thus is taxed at the applicable capital gains tax rate.
Such capital gain was taxable in the hands of the shareholders. For non-residents (including foreign companies), the provisions of Indian domestic tax law or an applicable income tax treaty, if more beneficial, apply.
Proposed tax regime on buy-backs
The Union Budget 2013 includes a provision that, effective 1 June 2013, an additional tax—at a rate of 20% (plus applicable surcharge and cess levy)—would be imposed on any amount distributed by an Indian company with respect to the buy-back of unlisted shares.
In other words, this tax would be imposed on the distributed income of the Indian company. This income would not be taxed again in the hands of the shareholder.
This tax would be:
- In addition to the normal income tax payable by an Indian company on its income
- Applied to distributed income which is to be computed as consideration paid on the buy-back of shares, reduced by the amount received by the company for issue of such shares
Effect on U.S., foreign companies
Because this tax would be levied on the distributed income of the Indian company, the income tax treaty protection / relief (if previously available) would not be available under the new regime.
Foreign companies (e.g., U.S. companies) that have made investment into India directly from the United States or from other jurisdictions (e.g., Mauritius, Singapore, and Netherlands) need to review their share buy-back plans in light of the fact that the new provisions (if enacted) would be effective 1 June 2013.
Read a March 2013 report [PDF 53 KB] prepared by KPMG LLP: India: Tax on buy back of unlisted shares