“In the interest of minority shareholders, I propose to tax the buyback as capital gains for all types of shareholders,” she said.To discourage abuse of tax arbitrage, promoters will be subjected to an additional buyback tax, increasing the effective tax rate to 22 percent for corporate promoters and 30 percent for non-corporate promoters, she said.
Sitharaman said, “A change in taxation on buybacks was made to address the improper use of the buyback route by promoters.”
The Income Tax Department on
Under the proposal, shareholders other than promoters will pay tax on such profits at the applicable capital gains tax rate. That is 12.5 percent for long-term capital gains, listed and unlisted, and 20 percent for short-term listed, and the applicable rate for short-term unlisted. However, to prevent promoters from abusing the buyback, they have to pay additional income tax. If a domestic company is a promoter, he will pay an effective tax of 22 percent on the profit on the buyback, and if the promoter is not a domestic company, he will pay an effective tax of 30 percent on the profit on the buyback.
“For promoters, the tax liability will largely remain the same if it is taxed as dividend in their hands,” the Income Tax Department said on X.
Market experts believe that the proposal to tax buyback proceeds as capital gains for all shareholders will ensure that tax only applies to actual profits. Further, the higher tax burden on promoters may lead companies to reassess their capital allocation strategies between dividends and buybacks.
The move brings the buyback in line with normal share sales for minority and retail stakes, while safeguarding revenues, the expert said.
Roop Bhootra, full-time director of Anand Rathi Share and Stock Brokers, said the proposed move is positive for individual shareholders as tax liability falls from 30 percent (top rate) to capital gains rates (short term 20 percent and long term 12.5 percent) and negative for corporates. It discourages buybacks and encourages companies to use reserves for capital expenditures and/or R&D.
At a post-Budget conference, Finance Minister Arvind Shrivastava also said it was a “relief” for shareholders.
“It is not a tax, an additional tax, it is a relief. The system of the buyback tax has been changed to make it a dividend income, that is, income at the applicable income tax rate on the hand of the shareholder.”
“The whole purpose of that change at that time was to abuse tax arbitrage by promoters. So the change that is being made for promoters is that an additional buyback tax is being levied on them, making the situation status quo for them again. So even today the marginal rate at which they would have been charged,” he added.
Previously, share buybacks were taxed primarily at the corporate level, with shareholders facing uneven or unclear outcomes. After the 2024 change, buyback proceeds will be taxed in the hands of shareholders, often at prevailing slab rates, on the entire receipt, without allowing deductions for the acquisition cost, market experts said.
“The change in buyback tax to treat it as capital gains as earlier is positive for retail and non-promoter shareholders. Even for promoter shareholders, it allows the cost to be offset against the buyback proceeds and the additional income tax is payable on the capital gain,” said Vaibhav Gupta, partner at Dhruva Advisors.
Parizad Sirwalla, partner and head of Global Mobility Services-Tax, KPMG in India, said a review of the buyback tax framework will impact investor behavior and short-term sentiment.
In market parlance, a buyback tax is a type of tax levied on companies that buy back their own shares from shareholders. Generally, governments impose this tax to discourage companies from distributing profits to shareholders through share buybacks rather than paying dividends. PTI
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