Budget 2024: Tax burden on share buybacks shifted to shareholders

Finance Minister proposes to tax income received on buybacks of shares in the hands of recipient

The government has shifted the tax burden on share buybacks from companies to promoters. The move will potentially help the Centre mobilise higher taxes and also address an anomaly that put the tax burden on all shareholders, irrespective of whether they participated in the buyback or not.

At present, the companies undertaking a buyback have to pay effectively more than 20 per cent as buyback tax. Meanwhile, shareholders tendering their shares don’t attract any tax outgo.

The Budget proposal comes almost four years after the government decided to shift the tax burden on dividends from companies the receivers, based on their tax slabs.

Both dividends and buybacks are means to return cash to shareholders. Given the higher tax outgo on dividends, several cash-rich firms, particularly from the IT sector, opted for buybacks to help their promoters save taxes.

In December, Tata Consultancy Services concluded its Rs 17,000 crore buyback. Promoter Tata Sons had tendered shares worth Rs 12,284 crore in the buyback. 

Earlier, Tata Sons had tendered its shares in the company in 2017, 2021, and 2022. According to a regulatory filing, the promoter has mopped up a total of $5 billion (Rs 41,895 crore) in these buybacks.

Given the simplicity, companies prefer repaying their shareholders via dividends instead of buybacks. Experts said the change in tax structure and complexities around it could mean companies shun buybacks.

Under the new structure, the entire amount received on buyback of shares would now be taxed as dividends in the hands of investors as per their tax slabs. Meanwhile, the cost of acquisition of shares tendered in the buyback will be considered as a capital loss, which will be eligible for set-off against other capital gains or carry forward.

“This makes the taxation of buyback more complex because the benefit of capital loss will be available only in the future when the investor has earned other capital gains,” said a note by Deloitte.

Another way out, according to experts, is companies announcing buybacks at a much higher premium to the market rate to help promoters offset the higher tax burden.