Buybacks: Promoters set to gain big from ‘zero tax’

The stock market crash in March may turn out to be a boon for promoters of many listed companies because there will be ‘zero tax’ outgo if they earn cash via share buyback offers.

Per data from nseinfobase.com, 18 large companies have already announced share buybacks to the tune of ₹3,500 crore in February and March. Tax consultants are of the view that many more will take this route to transfer surplus cash on their books to promoters this fiscal year.

Sun Pharma, Emami, Thomas Cook, Motilal Oswal and Praj Industries are among those that have announced share buybacks.

This comes even as the new dividend tax structure kicks in as announced by the finance minister in her Budget speech. There could be a slowdown in dividend payouts as the distribution tax comes in from April, under which promoters will have to pay 43 per cent tax.

For share buybacks, companies incur a tax outgo of 20 per cent. But this is treated as long term capital (LTC) in the hands of those receiving it. Long term capital gains tax is 11.96 per cent, including cess. But these LTC gains are grandfathered in India till 2018.

This means that nobody has to pay tax on LTC gains made in shares till 2018 and only the amount earned after that is taxed. But since the stock markets have crashed and valuation of almost all companies is near 2014 levels or even lower than that, share buybacks announced now will not attract any tax, experts told BusinessLine.

Most companies would find it cost effective to declare bonus shares and then go for buyback offers, tax consultants say. Long term is considered as shares held for more than one year, which all companies will show.

SEBI allows buyback transactions as regular stock market sale purchase deals. Once companies deduct 20 per cent on the surplus cash and give away the rest of the money to shareholders and promoters in the buyback offer, the money in the hands of recipients will attract only LTCG. But since the government has said that dividends will be taxed in the hands of recipients, that becomes income in the hands of promoters and shareholders and falls in tax brackets accordingly.