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Share buyback offers from large corporate houses are on the taxman’s radar. With India Inc announcing buyback of shares worth several thousands of crores over the past couple of years, the Income Tax Department has sent out notices to large stock market investors and even corporate houses demanding tax on capital gains earned by them by tendering their shares in a buyback offer.
A copy of the notice to large investors was reviewed by BusinessLine .
In financial year 2018 alone, 41 companies completed their share repurchase offers worth ₹49,067 crore, the highest ever. Of this, buyback offers by seven IT services companies accounted for ₹44,984 crore or 92 per cent. This includes the ₹16,000-crore buyback by TCS and ₹13,000 crore by Infosys. Close to ₹34,000 crore of buyback offers were announced by companies last year.
Enter the taxman
Market regulator SEBI allowed buyback transactions as regular stock market sale purchase deals; these were exempt from capital gains tax from 2015 onwards. Prior to February 2018, long-term capital gains from equity on stock exchanges were tax-exempt. Companies used this tool to give away their surplus cash to investors without any tax implication. But the tax department has concluded that buybacks through an acquisition window do not count as real trading of shares. Unlike equity trading on an exchange, the buyback price and the quantity of share are decided outside the exchange platform.
The tax department reasons that such a scheme or offer cannot be exempt from capital gains tax. It believes that a buyback is not covered under the definition of “taxable securities transaction” provided in section 97(13) of chapter VII of Finance (No.2) Act 2004. The Act deals with taxation of securities and provided for exemption of certain categories.
“The ball is now in SEBI’s court; it can make further amendments or put its foot down over how it wants buybacks to be treated,” said an expert associated with the matter.
The tax department is eyeing Section 46(a) of the Income-Tax Act to tax buyback offers.
Profit from buyback
The section states that any profit arising out of shares tendered in a buyback offer “shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities.”
“It is an opportunistic move by the tax department as the number of buybacks risen to eye-popping levels. The law’s intent is clear that long-term capital gains on shares, where STT is paid, should be exempt from any incremental tax,” the expert noted.
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