Multinationals with operations in India have only until May 31, 2013 to act before a newly proposed provision in India’s Finance Bill will affect their tax planning.

Private companies operating in India typically resort to a buyback of its shares instead of payment of the dividends to avoid a dividend distribution tax, particularly where the capital gains arising to the shareholders are either not chargeable to tax or are taxable at a lower rate.

The Union Budget 2013 includes a provision that, effective June 1, 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 Read More