FinMin may shift tax liability on share buyback to shareholders in Budget

In the upcoming Budget, the finance ministry may shift the tax liability on the buyback of shares from companies to individual shareholders who participate in the process, a report in the Financial Express (FE) on Tuesday said. 

The shift will bring the taxation of share buybacks on the same page as the dividend income. It will also remove the double taxation on buyback proceeds.

According to FE, the proposals were made by several market participants and it was also mentioned by the Securities and Exchange Board of India (SEBI) in its recent consultation paper. 

Additionally, it is also being seen if the companies can distribute the proceeds from the buyback to existing shareholders. The main objective is to ensure that the liability falls only on the existing shareholders and not on all of them. 

According to experts, Sebi's proposal would go a long way in enhancing the overall value proposition to shareholders. 

In FY13, a 20 per cent tax was imposed on unlisted companies on buybacks while giving capital gains waiver to shareholders. This was made applicable in FY20. However, shareholders continued to pay the capital gains tax. With the new rule, they may not be required to pay such a tax. 

"Shifting the burden of buyback tax to shareholders is better than distribution of buyback proceeds net of tax. Besides the advantage of lower tax rate on capital gains, in case of secondary purchase of shares, the benefit of cost of shares is not available and the company applies buyback tax on the difference between the original issue price and the buyback price, and this can significantly reduce the buyback proceeds available for distribution," Sumit Mangal, partner, Luthra and Luthra Law Offices India told FE.