Buyback tax likely to act as a deterrent

The ₹50,000-crore share buyback offers by listed companies in financial year 2018 has brought it under the radar of tax authorities. Finance Minister Nirmala Sitharaman on Friday imposed a share buyback tax (BBT) on listed companies at 20 per cent.

After its move to curb dividend distribution by taxing it at 15 per cent, now the government has shut the second door too — buyback — through which promoters used to transfer wealth to shareholders, by bringing buyback too under the tax net.

“Extension of buyback tax to listed companies will put a complete full stop to the instrument,” said Suresh Swamy, Partner, PwC — Financial Services. “Tax will now be levied on the income distributed by such listed companies as against only on unlisted companies earlier.

“The additional difficulty is that 20 per cent BBT is levied on the difference between the buyback price and the issue price.

“It completely ignores the cost basis of the shareholder tendering the shares. If capital gains were exempt or if the domestic law did not have GAAR (General Anti-Avoidance Rule) provisions, specific anti-abuse provisions may have been justified. However, with the revenue department having various tools under its belt to tackle tax abuse, these provisions only make the tax regime more difficult.” “The effect of the BBT is that listed company, whose buyback is still open today, would be taxed at 20 per cent plus surcharge and cess on the amount of consideration paid less issue price of such shares,” said Ashok Shah, Partner, NA Shah Associates LLP. Market regulator SEBI had 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.

Curb on move to avoid DDT

“In order to discourage the practice of avoiding Dividend Distribution Tax through buyback of shares by listed companies, it is proposed to provide that listed companies shall also be liable to pay additional tax at 20 per cent in case of buyback of share, as is the case currently for unlisted companies,” the Budget document said.

BusinessLine had reported on March 22 last year that the tax department had 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 shares are decided outside the exchange platform.

The tax department reasons that such a scheme or offer cannot be exempted 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.

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