Budget 2019 India: The idea behind the move is to discourage the practice of using buyback option to circumvent the dividend distribution tax (DDT) and encourage investments by firms.
Union Budget 2019 India: The government could look at excluding those listed companies who had started the process of buying back their shares before July 5 from paying the new tax on buyback income for these ongoing transactions. “I am not in a position to say whether that (grandfathering) can work or not, but will discuss this with the revenue department,” finance secretary SC Garg said at an event organised by industry body CII here.
In the regular Budget for FY20 presented in Parliament last week, finance minister Nirmala Sitharaman proposed a 20% tax (plus cess and surcharge) on buyback of shares by listed companies effective July 5, the Budget day. The idea behind the move is to discourage the practice of using buyback option to circumvent the dividend distribution tax (DDT) and encourage investments by firms. Over the last few years, listed and cash-rich Indian firms ramped up buybacks in order to reward their shareholders. The hike in DDT rate in the 2016-17 Budget gave a leg-up to the trend.
As per section 115QA of the Act, buyback of unlisted shares attracts additional tax at 20% (plus surcharge and cess) in the hands of the company distributing the income on such buyback. However, such income arising in the hands of shareholders is exempt under section 10(34A) of the Act. However, such provision has hitherto not been applicable on buyback of listed shares. It is now proposed that section 115QA of the Act will be amended to include such tax on buyback of listed shares. Further, section 10(34A) of the Act is consequentially proposed to exempt income received by the shareholders on buyback of listed shares.
Replying to reporters’ queries earlier this week, however, the chairman of Central Board of Direct Taxes (CBDT) Pramod Chandra Mody had categorically denied any plan to give a waiver for transactions already underway. The government, he said, was clear that the cut-off date was July 5. Any share buyback post that date would come under the purview of new tax, he iterated.
Garg said buyback is mainly undertaken by those companies which have cash, but see no investment opportunities. “Our preference would be that they invest so that there is no need to do the buyback.”