Union finance minister P Chidambaram in his budget 2013 has decided to levy a withholding tax of 20 % on profits distributed by unlisted companies to shareholders through buyback of shares. The move will deter unlisted companies opting for buyback of shares. 

Tax consultants Doshi, Chatterjee, Bagri & Co managing partner A K Doshi claims the move is an attempt to plug a loophole in the Income Tax Act.

"Income Tax Act presently taxes dividend payout by both listed as well as unlisted firms at 16.5 %. However, distribution of dividend through buy-back of shares by both listed as well as unlisted companies attracts lower rate of tax or is not taxed at all. It is for this reason alone that the finance bill 2013-14 has proposed this amendment," Mr Doshi said. 

The move will bring about a parity between distribution of dividend and distribution of money by way of buyback of shares by unlisted companies. Rough calculations by tax consultants suggest that the new levy will amount to 22.66 % (including a surcharge of 10 % and education cess of 3 %) on the difference between the original issue price and the amount received from buyback of shares. 

A company, having distributable reserves, usually has two options to dis-tribute the same to its shareholders - through dividend, or buyback of shares at a consideration fixed by it. In the first case, payment by company is subject to Dividend Distribution Tax (DDT) and income in the hands of shareholders is exempt. In the second case, the income is taxed in the hands of shareholder as capital gains. 

Unlisted companies have been resorting to buy back of shares instead of payment of dividends in order to avoid payment of DDT. "The new levy will curb tax evasion to an extent," said another consultant. 

Nicco Group chairman Rajive Kaul said, "following the announcement, buyback of shares by unlisted companies will be deemed as a dividend payout. These companies will have to pay DDT." (Economic Times)