Ahead of the first full budget of the Modi 3.0 government, Corporate India has once again strongly advocated for the removal of the Buy-back Tax (BBT) imposed on listed shares repurchased by a company through open market transactions on recognized stock exchanges.

This recommendation has been conveyed to the Finance Ministry in the recent pre-budget consultations and also in the pre-budget memorandum submitted to the Government, sources said.

In fact, India Inc had in January this year made a similar proposal ahead of the interim budget, they added. However there was no tax relief coming the way of listed corporates on this front. 

Typically Buy-back of shares by a company happens through two methods — one is the ‘Tender Offer’ and the other is ‘Open Market via Stock Exchange’ route. 

In a tender offer, a company makes an offer to buy a certain number of shares at a specific price, directly from shareholders. This is commonly described as a fixed price buyback.

However, in an open market mechanism, the company buys up to a certain number of shares. A ceiling price is fixed and the buyback can be done upto or below that particular price, not beyond that.

Buy-back tax was introduced on unlisted companies in 2013 and extended to listed companies from July 2019. The tax rate effectively worked out to 23.30 percent of the ‘distributed income’.

The government had in 2020 abolished the dividend distribution tax and made the dividends taxable in the hands of the recipient.

What does India Inc say?

Confederation of Indian Industry (CII) has in its pre-budget memorandum for upcoming full budget said that public listed companies are now increasingly adopting ‘open market through stock exchange’ method for buy-back purposes. 

Currently under this route tax is paid by both – capital gains tax by the shareholder and BBT by the company on the same transaction, resulting in double taxation, CII has said. 

As BBT was introduced to curb tax avoidance by the companies using the buy-back route and given that the promoter group cannot participate in buy-back in ‘open market through stock exchange’ method, the justification for levy of BBT does not exist in such cases, CII has submitted.

Hence, BBT should be exempted in case of listed shares wherein buy-back is under ‘open market through stock exchange’ method. 

Consequentially, exemption under section 10(34A) should also not be applicable and the transactions should continue to be subject to capital gains tax in the hands of the shareholders, CII has said.

On its part, FICCI has in its pre-budget memorandum said that BBT was introduced to counter-balance Dividend Distribution Tax (DDT). With DDT having been abolished in 2020, the corresponding levy of BBT is not justifiable, FICCI has submitted.

Under the current regime, shareholders would be paying capital gains tax on the same transaction on which company has paid BBT which results in double taxation of the same income. “It is a well settled principle that no provisions of the Income Tax Act can be so interpreted that it results in double taxation”, FICCI has said.

The apex chamber has suggested that the scope of BBT must exclude Buy Back under Open Market offer through Stock Exchange. This would encourage more listed companies to resort to buy back mechanism, it added. 

Mukul Bagla, Chair of PHDCCI’s Direct Tax committee, said that that amount received on buyback of shares should be  taxable  in the hand of the shareholder and not in the hands of the company.

It is suggested that the tax paid by the company at the rate of 20 per cent should be shifted to the shareholder and not to the company as the person receiving the income should be taxed and not the person paying the income, he added.