Capital gains tax on buyback
A major announcement of the budget, on which investors are keeping a special eye, is that now capital gains tax will be levied on share buyback. Finance Minister Nirmala Sitharaman said that buyback will be taxed as capital gain for all types of shareholders. He also said that to prevent tax fraud, additional buyback tax will be imposed on promoters. This will make the effective tax rate for corporate promoters 22% and non-corporate promoters 30%.
Why capital gains tax on buyback?
While addressing the media after the budget, Revenue Secretary Arvind Srivastava made it clear that this step is not to increase taxes but to provide relief. He said that earlier the earnings from buyback were considered as dividend income and were taxable. Now it has been fixed. The purpose of the change is to prevent misuse of tax by promoters. The situation for promoters is the same as before, while the rest of the investors will get relief.
Deloitte India partner Pramod Batra said that capital gains tax has been re-introduced on share buyback of companies. Promoters may be taxed at 22% to 30% (separately including surcharge and cess). This will force companies to think again between paying dividends or doing buybacks.
Tax responsibility on shareholders
According to Roop Bhootada, whole-time director of Anand Rathi Share and Stock Brokers, this change is beneficial for common investors. Tax will be reduced from the highest slab of 30% to capital gains rate (short term 20% and long term 12.5%). However, this is negative for companies and will motivate them to invest money in capex or R&D instead of buyback.
Vaibhav Gupta, M&A Partner, Dhruva Advisors, said that this change is good for retail and non-promoter shareholders. The overall tax rate for promoters has not changed, but they will now be able to adjust capital loss against the income from buyback. However, there may be a dispute on this from the tax department.
Additional tax on promoters
Generally, buyback tax is imposed on companies that buy back their shares instead of paying dividends. Its purpose is to control the way of distribution of profits. Overall, this change in buyback tax rules may impact investor behavior and market sentiment.