Taxation may end chances of structured share buyback programme: Report

The report said that the 20 per cent taxation on share buyback announced in the Finance Bil 2019 is an alternative form of income tax.

Published: 07th July 2019 03:45 PM  |   Last Updated: 07th July 2019 03:45 PM   |  A+A-

Income Tax

For representational purposes


NEW DELHI: The 20 per cent taxation on share buyback announced in the Finance Bil 2019 may bring an end to the possibility of a structured share buyback programme, a report said.

"We have advocated buyback consistently and we believe a structured buyback programme (akin to Accenture) will provide sustainable EPS kicker and improve RoE. The buyback route becomes more attractive through an open market route when the same is done at multiples lower than post tax yield on excess cash. Imposition of the tax makes the buyback case difficult," said a Kotak Institutional Equities report.

The report also said that the 20 per cent taxation on share buyback announced in the Finance Bil 2019 is an alternative form of income tax.

"IT companies have received valuation support, courtesy smart capital allocation decisions. Chief among them was to step up payout ratios. The amendment leads to taxation of at least 20 per cent on payout to shareholders, a disincentive. This tax is effectively an alternative form of income tax," said the report.

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The Finance Bill 2019 has introduced tax of 20 per cent on distributed income for buyback of equity shares listed on a recognized stock exchange.

The amendment made in the Finance Bill of 2019 states the following-Clause 36 of the Bill seeks to amend Section 115QA of the Income Tax Act relating to tax on distributed income to shareholders. Sub-Section (1) of the said section provides that a domestic company shall be liable to pay additional income tax at the rate of twenty per cent on the distributed income on buy-back of shares listed on a recognised stock exchange from a shareholder.

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The Finance Bill proposed to amend the said sub-section so as to provide that the provisions contained therein shall also apply to the buyback of shares listed on a recognised stock exchange. This amendment will take effect from July 5.

"Effectively buyback of equity shares will attract tax at the rate of 20 per cent (plus surcharge). We note that dividend distribution also attracts a tax of 20.56 per cent. The rationale of imposing this tax is a belief that companies are using buyback to circumvent payment of dividend distribution tax. On the face of it, the tax on buyback of equity shares does not differentiate between the mode-tender or open market route, implying tax liability on both modes of buyback," the report said.

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