NEW DELHI: Industry representatives have recently submitted representations to the finance minister, urging a reconsideration of new taxation rules concerning the buyback of shares. The 2024 Union Budget imposed up to a 39% tax on shareholders who sell their shares back to the companies, treating this transaction as dividend income.
Previously, companies would face a buyback tax of 23%, but new provisions have shifted tax burden onto individual shareholders, which the industry claims to be unfair and inequitable. Experts argue new tax rate is disproportionately higher as gainst long-term capital gains tax (LTCGT) of 12.5% and short-term capital gains tax (STCGT) of 20%, which apply when shares are sold to other buyers.
The Direct Tax Committee of the PHD Chamber of Commerce and Industry has raised key concerns regarding implications of the new buyback tax. As per them, there is a major issue concerning tax classification. Share buyback is currently classified as a transfer of a capital asset, and many believe it should be taxed as capital gains rather than as income. This view holds that taxing buybacks as dividends contradicts established tax principles.
Another concern is unequal treatment of shareholders. The stark difference in tax rates is troubling; shareholders face up to 39% tax when selling shares back to the company. This discrepancy makes the buyback option less attractive for investors.
“Income realised consequent to shares being bought back should have been treated as capital gains income; this would align with underlying nature of transaction,” said Lokesh Shah, partner, IndusLaw.
He adds that in current framework to treat buyback as dividend, cost of share acquisition is available as deemed capital loss for shareholder. “Deemed capital loss is available for offset against eligible gain (long term/short term) that may be recognised in the future. In the event, no such gains occur to shareholder in next eight years, the loss recognised consequent to the buyback is a lost cost.”
“... the provision that in such a case the purchase price of `100 shall be treated as long-term/short-term capital loss to be offset against future capital gains is unjust and unfair because the person may not have any capital gains in future and may be too old to live long enough to earn the capital gains to offset his such capital loss,” argued PHD Chambers of Commerce.