An unexpected development in this year’s budget was the proposal to tax share buyback income. Finance minister Nirmala Sitharaman proposed that income received on share buybacks should be taxed for the recipients.
“It is proposed that the income from buyback of shares by companies be chargeable in the hands of the recipient investor as dividend, instead of the current regime of additional income-tax in the hands of the company,” Sitharaman said.
Further, the cost of such shares will be treated as a capital loss to the investor, she said.
“For investors, taxation on share buybacks could potentially dampen enthusiasm as the income will now be taxed at the same rate as dividends,” said Vipul Bhowar, senior director, listed investments, at Waterfield Advisors.
According to Prashant Bhojwani, partner, corporate tax, tax & regulatory services at BDO India, buyback income will now be taxed at a higher rate than the previous 20% rate for companies. Moreover, shareholders receiving this income cannot deduct any expenses, although they can use the purchase price of the shares bought back to reduce other capital gains.
In simple terms, income from share buybacks will now be taxed as dividend for shareholders, based on their income-tax brackets.
Currently, buybacks are taxed at 20% in the hands of companies, with no additional tax for investors. However, going forward, companies will no longer withhold taxes on buybacks.
Although this potentially reduces their overall tax liability on buyback of shares, the change could still lower investor enthusiasm. On the other hand, companies no longer face a 20% tax burden on buybacks, which boosts their cash flow. This would affect mainly cash-rich companies and high-income investors.
Buyback income being taxed in the hands of investors takes away the advantage of lower buyback tax which was paid by the company, and this equates buyback proceeds and dividends in the form of taxation, said Sailesh Raj Bhan, CIO-equity investments at Nippon India AMC. “Preference of buybacks over dividends should reduce post this development.”
Less attractive
Ajay Menon, MD & CEO, broking and distribution at Motilal Oswal Financial Services Ltd, agreed.
“Overall, this move would make buybacks less attractive now, with similar taxation as dividends. Hence, going forward, we could see fewer buyback announcements with companies preferring dividends,” he said.
In essence, the advantage of choosing buybacks over dividends has vanished.
In 2023, 38 listed companies completed buybacks worth ₹45,130.34 crore. So far in 2024, 20 companies have wrapped up buyback plans totaling ₹8,335.33 crore, according to Capitaline Database.
Roop Bhootra, CEO of investment services at Anand Rathi Shares and Stock Brokers, pointed out that the buyback route was one of the last left for investors seeking to exit a company without any tax liability. According to him, the net result of this new development could be a lower number of buybacks, going ahead.
Bhootra also said companies might now look to deploy surplus money in capital expenditure.
“As the buyback tax (under Section 115QA @23.296%) remains the same in the hands of companies, there will be no incentive for promoters to go for buyback and instead, they may come back to prefer dividends as a preferred route for distributing income,” said Dhiraj Relli, MD & CEO at HDFC Securities.
The amendment will take effect from 1 October, 2024.
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