With the financial year-end looming large and the Centre walking a fiscal tightrope, there’s understandable pressure on the income-tax department to meet its annual revenue targets. But reports that tax officials are once again raking up the issue of capital gains tax on share buybacks suggests that they are now scraping the bottom of the barrel on ideas. India Inc has seen record share buybacks in the last couple of years with pay-outs topping ₹34,000 crore in FY17 and ₹49,000 crore in FY18. Corporate India developed a sudden affinity for share buybacks after the 2016 budget, which slapped a 10 per cent additional tax on large shareholders (read promoters) receiving over ₹10 lakh a year in dividend income. This levy, on top of distribution tax, took the effective tax rate on dividends for such investors to over 30 per cent, and opened up tax arbitrage in favour of buybacks. But while tax evasion is a crime, tax avoidance isn’t. Therefore, if the tax department is keen to close this loophole, it should introduce clear tax provisions to this effect, instead of attempting creative interpretation of existing rules.

Tax laws on share buybacks have already gone through multiple iterations in recent years, making computations a complex affair for investors. Under section 46A of the Income Tax Act, shareholders in companies are by default required to shell out capital gains tax when they receive distributions through buybacks. In 2015, as companies were allowed to buy back stock on the exchange platform, the transactions became liable to securities transaction tax (STT) and won the linked exemption from long-term capital gains tax (LTCG) as well. Unhappy with this, the Centre has since added many caveats. As things stand today, buybacks of unlisted shares, those tendered off-market and those where the investor has skipped STT on either the purchase or sale, are all subject to LTCG tax. It is only buybacks via the exchange where the investor has paid STT on both legs of the transaction, that escape the tax. This seems fair given that, to the shareholder, there is no difference between selling shares to the company itself on the exchange platform, and selling them to a third party. The taxman’s contention that buyback-related sales on exchanges don’t count as real stock market trades appears flimsy.

Such last-minute fishing expeditions on the tax front create avoidable anxiety for investors. Also, the very idea of stiffly taxing companies seeking to return capital to their shareholders, is retrograde. The world over, stock buybacks are deemed shareholder-friendly because they boost earnings and send out positive signals on valuation. In a capital-starved economy, allowing companies to return excess capital at periodic intervals is the best way to ensure that capital moves freely from mature to more needy enterprises. Allowing such capital mobility should be deemed far more important than meeting short-term revenue goals.