Union Budget 2020 India: In pre-Budget representations, market participants sought that buyback taxation on listed companies should also be removed or streamlined, keeping in mind the price volatility of listed shares.
Union Budget 2020 India: Capital market participants have a long wish list for finance minister Nirmala Sitharaman for the upcoming Union Budget, to be presented on February 1. The market is expecting the FM to do away with the dividend distribution tax (DDT). Tax advisors have made representations to the finance ministry seeking the removal of buyback tax for listed companies as well. Market players are also expecting rationalisation of long-term capital gains tax imposed in 2018.
The removal of DDT has been a long-standing demand of capital market participants. Currently, listed companies have to deduct DDT before paying dividend to their shareholders. The current tax rate is 15% on the gross amount of dividend declared. Tax experts said the effective rate comes up to over 20%, including a 12% surcharge and a 3% education cess. DDT contributes around ` 60,000 crore to the government’s kitty. “What has been suggested and is being worked upon is that DDT should be removed altogether. The income from dividend should instead be taxed at the hands of the players or shareholders as other income. For instance, a corporate entity may pay 22% tax, individuals pay tax as per their tax slab and non-residents as per respective tax treaties,” Tushar Sachade, Partner, PwC told FE.
The buyback tax has been another thorny issue under discussion. The last Budget in July 2019 introduced amendments in the Finance Act to levy a 20% tax on listed companies for capital gains made through buyback of their own shares. The measure has already been in place for unlisted companies since 2013. The move was introduced to prevent tax avoidance by companies who would reward shareholders by buying back shares, in order to circumvent paying taxes on dividend distribution.
In pre-Budget representations, market participants sought that buyback taxation on listed companies should also be removed or streamlined, keeping in mind the price volatility of listed shares. “There is a demand to reverse buyback taxation for listed companies. In case of a buyback, the capital gains are made by the shareholder but the tax is currently paid by companies based on the investment value or issue price of the shares, not on the basis of actual gains made by the shareholder. So, in a listed company, the buyback may happen at a higher price compared with issue price, and capital gains taxes have to be paid even if the shareholder makes a loss to market price. It has been suggested to tax shareholders instead on the capital gains made, if any, from a listed company buying back shares,” Sachade said.
Markets are also expecting an increase in the holding period for long term capital gains (LTCG) tax on equities to at least two years. Currently, investors pay LTCG tax of 10% on holding equity in a listed entity for over 12 months and 20% if they hold equity in an unlisted entity for over 24 months. “Specifically, for capital markets, there is growing expectation that the government might give some relief on the LTCG front through nil or zero LTCG (tax) for holdings of over two-three years,” said Gaurav Dua, capital market strategy and investments head, Sharekhan by BNP Paribas.
There has also been a push from participants to rationalise the LTCG tax rate for holdings in unlisted entities. “For venture capitalists and private equity funds, there is a recommendation that rates should be aligned between
LTCG taxation for listed and unlisted entities at 10%,” Sachade said. Additionally, there is also a demand for removal of surcharge, which was announced in last Budget and currently is still applicable on some categories of investors for share transfer in unlisted companies. “For certain categories of foreign investors, including individuals and non-corporates (other than limited liability partnerships), a higher surcharge is applicable. With the surcharge (on share transfer of unlisted equities) the LTCG will become 28% effective tax rate. In listed companies LTCG is 10% and surcharge is not applicable. This needs to be rationalised and, at least in case of capital gains income for unlisted companies the surcharge should be rolled back,” Sachade said.
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Last Budget, Centre had announced a surcharge on capital gains for the super-rich taxpayers —25% for those with annual taxable income of `2-5 crore and 37% for those earning more than `5 crore. This reportedly took the effective tax to 39% and around 43%, respectively. The move saw FPIs withdrawing around $3.7 billion from the Indian markets in July and August following the announcement. The government on August 24, 2019, withdrew the surcharge on “tax paid at special rate” on income from the transfer of equity shares in a firm, units in equity oriented funds and in business trusts.
However, the higher surcharge still applies for individuals and some non-corporate FPIs investing in unlisted entities.