Share buybacks surge as firms brace for new tax rules starting October 1

Starting October, under the revised budget provisions, taxes on share buybacks will be levied on the shareholders receiving the proceeds, according to their respective tax slabs

Corporations are hastening their share repurchase efforts ahead of new tax regulations set to take effect on October 1, according to The Economic Times. The recent budget proposal outlines that under the new rules, shareholders will be taxed on buyback proceeds based on their tax brackets. Currently, these transactions are taxed at approximately 23 per cent at the corporate level.

In the three weeks following the budget announcement on July 23, 15 companies have declared share buybacks, the report said. This is a significant increase compared to the 18 companies that announced buybacks between January 1 and July 23.

On July 30, Indus Towers revealed a share buyback plan valued at Rs 2,640 crore. Shortly after, on August 7, AIA Engineering announced a Rs 500 crore buyback. Additionally, companies like Welspun Living, TTK Prestige, Cera Sanitaryware, VLS Finance, Navneet Education, and Dhanuka Agritech have also initiated buybacks within the last three weeks.

Market analysts predict a surge in buyback announcements over the coming month, but expect a sharp decline after October 1.

Gaurav Dua, head of Capital Market Strategy at Sharekhan by BNP Paribas, noted that from October, buybacks will no longer provide a tax advantage, as quoted by the business-daily. 

Starting October 1, under the revised Budget provisions, taxes on share buybacks will be levied on the shareholders receiving the proceeds, according to their respective tax slabs. The tax will apply to the entire buyback amount, with the acquisition cost of the shares recorded as a capital loss, which can be used to offset future gains from other share sales.

Other companies that have announced buybacks since July 23 include Symphony, Chaman Lal Setia, Mayur Uniquoters, Savita Oil Tech, Ladderup Finance, and Arex Industries. Additionally, Technocraft Industries’ board is scheduled to meet on Tuesday to discuss a share buyback proposal.

When the tax burden on dividends was transferred to companies in 2003, payout ratios increased, including as a percentage of profits available for dividends, since major shareholders no longer had to bear the tax themselves. However, when taxation was shifted back to the recipient in April 2020, dividend payout ratios decreased.

While listed companies are mandated to maintain a clear dividend policy, there is no such requirement for share buybacks.