The Hindu Business Line : The buyback season

Sometimes even a blatant mistake or inequity doesn’t stand out in normal times — it takes extraordinary times, may be a crisis, to highlight the enormity of the mistake or inequity. Exemption from Dividend Distribution Tax (DDT) in respect of money splurged by a company on buyback is a case in point.

Cash dividend paid ratably on all shares is liable to DDT but not when the same is disguised and built into the purchase price of shares bought back by a company. This discrimination could well encourage companies to resort more to buyback rather than pay upfront ratable cash dividend.

This is the buyback season with companies buying up their own shares with gusto out of accumulated profits assiduously built over the years with the avowed intention of shoring up their sagging market quotations.

A fiscal law, in particular, should be neutral and not prefer one mode of transaction over the other. There is no reason why the income-tax law should be bent to give a leg up to an exercise considered by many as cynical and often self-serving catering to the promoters’ interests more than the public’s. To be sure, heightened demand for shares in the market set off by buyback may take up the quotation a notch or two in view of the fewer number of shares now floating around but this in itself cannot pass off as altruism to justify the Revenue’s sacrifice.

More often than not, the increase in the market price is only a tangential motive with the real motive being to beef up the control of the promoters on the company at no expense to them — a 20 per cent buyback would take up the promoter’s existing 20 per cent stake to 25 per cent with the hefty hike in stake entirely bankrolled by the company.

Tax sacrifice

It is amazing that a tax sacrifice is being made for an unworthy cause. It would be instructive to know incidentally how much the exchequer has lost so far by this act of self-abnegation.

Shares can be bought back either from the market or ratably from the shareholders other than the promoters. Companies in India have lately been showing the proclivity to make market purchases because that turns out to be cheaper what with the market being weak and not demanding the maximum price the company is prepared to pay. Had this maximum price been paid to the public shareholders ratably, the buyback would perhaps have passed muster on the touchstone of public interest condoning thereby, if not justifying, the unmerited tax sacrifice.

That the putative, resultant spurt in quotations would give rise to greater capital gains in the hands of the sellers is no consolation for the Revenue because the Government has indulged in another act of self-abnegation — not to tax long-term capital gains earned through the bourses.

Capital gains of course are independent of dividend and therefore even if capital gains are taxed it wouldn’t justify exemption to dividend guised as purchase consideration.

Parenthetically, the Government is worried about slowdown in advance tax collection on the back of recession. The Bombay Chief Commissioner has gone on record making the extraordinary and strange request of calling upon corporates to pay advance tax immediately.

A company is not obliged to pay advance tax if it does not anticipate profits. And it would be perfectly justified in revising its calculations and reducing its successive instalments in the light of the unfolding negative events. At any rate, it has to pay interest on short-payment of the instalments and therefore whether it pays advance tax or not is entirely its funeral, as it were. In the event, the Bombay Chief Commissioner’s call to corporates is just plain presumptuous.

This incident has been highlighted herein only to reinforce the point that the Government and its functionaries often bark up the wrong tree even while passing up opportunities to pluck low-hanging fruits.

(The author is a Delhi-based chartered accountant. blfeedback@thehindu.co.in)

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