One of the key announcements from the Budget that’s been at the centre of investor attention is that buybacks would be “taxed as capital gains”. Finance Minister Nirmala Sitharaman said that buybacks will be taxed as capital gains for all categories of shareholders.
She added that “to discourage misuse of tax arbitrage, promoters will be subject to an additional buyback tax, raising the effective tax rate to 22% for corporate promoters and 30% for non-corporate promoters.”
Buyback to be taxed as capital gains tax: The rationale
Speaking at the media address after the Budget, the Revenue Secretary Arvind Shrivastava clarified that the move is actually a relief, “It is a relief, not a tax.” He explained that earlier buyback gains were considered equivalent to dividend income, and tax was applicable. “That has been corrected. The whole objective of the change is the misuse of a tax arbitrage by promoters. As far as the promoter is concerned, it is status quo, big relief for others.”
Promod Batra, Partner, Deloitte India, clarified that, “Capital gains tax is being reintroduced on buy-back of shares by companies. To disincentivise misuse of tax arbitrage, Promoters to pay additional tax, which could be anywhere from 22% to 30% plus surcharge and education cess, depending on the category of promoter and period of holding of shares. Bring back the companies on the drawing table to make a choice between the dividend or buy-back route.”
Shift in tax liability to shareholders
Given the fact that the new proposal explicitly states it will be taxed as capital gains, Roop Bhootra, Whole-time Director, Anand Rathi Share and Stock Brokers, said the proposed move is a positive for individual shareholders. She explained that “as tax liability reduces from 30% (highest slab rate) to capital gains rates (short term 20% and long-term 12.5%) and negative for corporates and discourages buyback and pushes corporates to use reserves for capital expenditure and/or R&D.”
Vaibhav Gupta, M&A Partner at Dhruva Advisors, pointed out that “the change in buyback taxation is welcome for retail and non-promoter shareholders. For promoters, although there is no change in the total tax rate, it enables them to offset the costs against the buyback income. “
Gupta explained that “if there are capital losses, the same can also be offset against the buyback income, and the additional income tax should be payable only on the net amount. However, this may be litigated by the tax authorities, especially in cases where there are other capital gains incomes also in the same year and offsetting capital losses against such other capital gains is likely to lead to higher tax outgo.”
Additional tax for promoters
In market parlance, a buyback tax is levied on companies that buy back their own shares from shareholders. Generally, governments impose this tax to restrain firms from distributing profits to shareholders through share buybacks rather than paying dividends.
All in all, the revamp of the buyback tax framework is expected to influence investor behaviour and short-term sentiments.