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Share buyback offers will make a comeback post April 2020 when the new tax regime with regard to dividend distribution tax (DDT) announced in this year’s Budget, kicks-in.
The peak tax outgo for company promoters in case of buyback offers will be just 10 per cent plus a small surcharge. Instead, the peak tax outgo against dividends received will be 43 per cent. Such massive savings in tax outgo will lead to promoters choosing the buyback offers to distribute surplus cash instead of dividends, experts told BusinessLine.
Experts are of the view that buyback offers will still be a major draw as tax outgo is next to nothing for a large number of promoters under the scheme.
Market regulator SEBI allows buyback transactions as regular stock market sale purchase deals; these got exemption from capital gains tax from 2015 onwards.
Once companies deduct 20 per cent on the surplus cash and gives away rest of the money to shareholders and promoters in the buyback offer, the money in the hands of recipients will attract only long term capital gains tax (LTCG). The peak rate of LTCG is 11.96 per cent. For the promoters, the tax outgo will be negligible as no LTCG is applicable on the gains made above their holding value up to 2018. LTCG was re-imposed in 2018 Budget and gains before that are grandfathered.
“Easy way for most companies could be to declare bonus shares and then go for buyback offers,” said a senior partner with one of the Big 4 tax consultants.
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