The Budget 2024 proposal to scrap buyback tax for companies and in turn tax the payouts as ‘deemed dividends’ at the hands of recipients is set to reduce interests in share repurchase programs among promoters, say tax experts.
Going forward, companies, especially cash-rich ones, may prefer dividends over share buybacks, they said.
Vipul Bhowar, Senior Director, Listed Investments, Waterfield Advisors, said, ,The elimination of the buyback tax will increase corporate cash flow, but the new taxation of buyback income as dividends may decrease interest in share repurchase programs, particularly among cash-rich firms and high-tax bracket investors. In the future, companies might favor dividends over buybacks.”
Buyback of shares has been a frequently opted route for top software companies to pass on the excess cash to their shareholders.
Ahead of the first full budget of the Modi 3.0 government, Corporate India had strongly advocated for removing the Buyback Tax (BBT) imposed on listed shares repurchased by a company through open market transactions on recognized stock exchanges.
In fact, India Inc. made a similar proposal in January this year ahead of the interim budget. However, listed corporates did not receive any tax relief on this front in January.
A company typically buys back shares through two methods: the ‘Tender Offer’ and the ‘Open Market via Stock Exchange’. In a tender offer, a company offers to buy a certain number of shares at a specific price directly from shareholders. This is commonly described as a fixed-price buyback.
However, in an open market mechanism, the company buys up to a certain number of shares. A ceiling price is fixed, and the buyback can be done too up or below that particular price, not beyond that.
Buyback tax was introduced on unlisted companies in 2013 and extended to listed companies from July 2019. The tax rate effectively worked out to 23.30 per cent of the ‘distributed income’. The government abolished the dividend distribution tax in 2020 and made the dividends taxable in the hands of the recipient.