In the Budget, the finance minister has announced a levy of 20% tax on buybacks effective immediately (5th July, 2019).
In FY20 budget, FM announced two measures that are applicable to all but more relevant for IT cos. 1) Buybacks will now attract 20% tax to remove tax arbitrage vs. dividend tax of 20.5% – IT cos have returned over US$12bn through buy-backs in recent years. Infosys’ ongoing buyback will now likely have tax implications for remaining Rs 2,400 crore. 2) FM’s proposal to Sebi to increase minimum public share holding from 25% to 35%, if implemented, would impact TCS & Wipro.
20% tax on buybacks is similar to dividend. In the Budget, the finance minister has announced a levy of 20% tax on buybacks effective immediately (5th July, 2019). This removes the tax arbitrage between buy-backs and dividends, with the latter being already subject to 20.5% dividend distribution tax. We note that all top tier IT services companies have been using buy-backs as a more tax efficient way to return excess cash on balance sheet to shareholders in addition to regular dividends — the top five companies put together have returned over Rs 86,700 crore (US$12 billion) over the last 3 years through this route.
Going forward, IT services cos will need to decide whether they still want to opt for buy-back route given limited tax advantages (we note that there could still be some tax advantage of buy-backs for investors earning more than Rs1 million in dividend per year).
The FM has also asked Sebi to consider raising the minimum public shareholding threshold for listed cos from existing 25% to 35%.
We note that this is still at proposal stage and may not in fact be implemented.
However, if such a rule is enforced it would require significant stake sales by the promoters of TCS and Wipro where public shareholdings are well below 35%.