Govt proposes final withholding tax on profits of unlisted cos

Some unlisted companies avoided dividend distribution tax by arrangements involving buyback of shares

Aiming to prevent tax avoidance arrangements, Finance Minister P Chidambaram today proposed to levy final withholding tax at the rate of 20% on profits distributed by unlisted companies to shareholders through buy-back of shares.

"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 while unveiling budget proposals for 2013-14 in Parliament.

The Finance Minister also proposed to increase the rate on payments by way of royalty and fees for technical services to non-residents from 10% to 25%.

"Another case is the distribution of profits by a subsidiary to a foreign parent company in the form of royalty. The rate of tax on royalty in the Income Tax Act is lower than the rates provided in a number of Double Tax Avoidance Agreements (DTAA). This is an anomaly that must be corrected," he said.

However, the applicable rate will be the rate of tax stipulated in the DTAA, Chidambaram added.