scorecardresearchIncome Tax: How are share buybacks taxed in India?

Income Tax: How are share buybacks taxed in India?

Updated: 10 Jan 2023, 07:59 AM IST
TL;DR.
When a publicly traded firm uses funds to acquire shares of its own stock in the open market, it is known as a stock buyback.
A stock buyback is accessible to all stockholders and is not intended to target any particular class.

A stock buyback is accessible to all stockholders and is not intended to target any particular class.

Share buyback in a common practice in the financial markets. When a publicly traded firm uses funds to acquire shares of its own stock in the open market, it is known as a share buyback. The company uses money that the business did not use to finance operations and other investments for this purpose. 

A stock buyback is accessible to all stockholders and is not intended to target any particular class.

In the current fiscal year up till December 31, 2022, there were 44 buybacks totaling 18,703 crore, according to a Financial Express report citing sources. Tata Consultancy Services, MOIL, and One97 Communications are among the companies that announced buyback offers last year.

Amidst these developments, the finance ministry is exploring a plan to transfer the tax responsibility on share buybacks from businesses to individual shareholders who are involved in the process. It is intended to tax share buybacks in a manner similar to tax on dividend income, said Financial Express.

To understand this better, let us discuss how share buybacks are currently taxed in India.

In the case of an unlisted company

According to Section 115QA of the Income Tax Act, buybacks of shares by unlisted firms are taxed at a flat rate of 20 percent on the "distributed income." Distributed income is the amount the firm earned after deducting the price it paid to buy back the shares from the price it paid to issue them.

The main reason for tax was to stop foreign corporations from claiming tax treaty benefits on capital gains, wherein the companies would buy back shares instead of declaring dividends, giving them tax-free capital gains

While buyback tax was introduced on unlisted firms in 2013, the provision was expanded in July 2019 to include all corporations, including publicly traded ones.

In the case of a listed company

If the company is publicly traded, there are two ways the repurchase might be executed. The first option is the offer tender route, in which the shareholder directly transfers his shares to the company in response to an offer made by the company at a specific price. There is no double taxation when using the offer tender method since the firm pays the buyback tax and the shareholder would be exempted from capital gains taxes.

The second option is the open market route, in which the company issues a statement and purchases its own shares at a price that does not exceed a specific price.

The seller of the shares here is unaware of who the buyer is - whether it is the firm that is buying back its shares or an investor, as these market transactions are comparable to any other and are carried out through the stock exchange trading platform. Therefore, even though the firm would be paying the buyback tax on the shares it has purchased back, the seller of the shares would still be responsible for paying capital gains tax on the sale.

This aspect of taxation mostly arises from the open market route's inherent characteristics, where both buyers and sellers are anonymous.

To tackle this concern, many market participants have proposed to transfer the tax responsibility from the businesses to investors. The present system of double taxing repurchase proceeds, where shareholders additionally pay capital gains taxes on the gross amounts received, will no longer apply in case of a change in tax responsibility.

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First Published: 10 Jan 2023, 07:59 AM IST