NEW DELHI: Amid the ongoing debate regarding the taxation of share buybacks, Revenue Secretary Sanjay Malhotra has said that these transactions should be treated as dividends.
He said that a significant portion of dividends is received by the high net worth individuals (HNIs), who are subject to a tax rate of 39%. He pointed out that the current framework allowed for a situation where lower-income taxpayers, with rates of 5%, 10%, or 15%, were disproportionately shouldering the tax burden that should have been borne by HNIs.
Malhotra explained that the previous tax structure allowed companies to conduct buybacks as a means of avoiding the higher tax rates associated with dividend distributions. He stated, “Instead of paying dividends, companies were doing buyback. This was a tax avoidance measure which has now been plugged. Previously, dividend was taxed in the hands of the company, so buyback was also taxed in the hands of companies. Similarly, now both will be taxed in the hands of recipients,” added Malhotra. He said people should pay on the basis of tax slabs and there is no double taxation.
With regard to removing indexation benefits from sale of property along with reduction of tax rate to 12.5% from 20% on long-term capital gains (LTCG), He said, “It is a move for tax simplification, it is a move for removal of tax arbitrage and it is a move to slightly remove disparity in taxation on capital gains.” He added, “When one house is sold and another house is purchased, if it is within `10 crore then there is no tax on the gains. Only for very small number of people, the effective tax rate will go up.”
He said that real estate doesn’t have any special dispensation, except for cases involving the sale of a house and the purchase of another house. When shifting from one locality to another, any number of houses can be sold, provided that the gains are within `10 crore. There is a tax only if the gains exceed `10 crore.