Industry associations have urged the finance ministry to rationalise the taxation of share buybacks and restore parity by treating the proceeds as capital gains rather than deemed dividends. The demand was raised by a few industry bodies during their pre-Budget meeting with Revenue Secretary Arvind Srivastava.
In Budget 2024, the government had changed the tax treatment of buybacks by classifying the amount received as deemed dividend income in the hands of shareholders, without allowing any deduction for the cost of acquisition. Earlier, buybacks were taxed at the company level at an effective rate of 23.296% of the distributed income — calculated as the difference between the buyback price and the issue price of the shares.
In its representation to the Revenue Secretary, PHDCCI said the buyback of shares qualifies as a transfer of a capital asset under Section 2(47) of the Income Tax Act, as it involves the relinquishment of an asset. Therefore, taxing it as a deemed dividend instead of capital gains may go against the settled principles of taxation.
“Also, not allowing deduction towards the cost of shares results in very high taxation in the hands of shareholders,” PHDCCI noted.
Assocham, in its submission, pointed out that international practice treats buybacks as dividends only to the extent of profit distribution. “Hence, the new regime’s treatment of buybacks as dividend-cum-capital loss should not apply to buybacks made out of share premium or from proceeds of another issue of shares or securities, where no retained earnings are being distributed,” it said.
The issue has gained attention after Infosys promoters — including N R Narayana Murthy, Sudha Murthy, and Nandan Nilekani — opted out of the company’s ongoing share buyback programme despite a premium of over Rs 300 per share to the prevailing market price. Experts believe the move was driven by tax considerations, as the new regime results in steep tax liabilities for individual shareholders participating in buybacks.
