New Tax Rules on Share Buybacks

Source: Mint

Context:

From 1 October 2024, India’s share buyback tax regime underwent a major transformation as per amendments in the Finance Act, 2024. The change aligns the tax treatment of buybacks with dividends, thereby impacting investor returns and corporate payout decisions.

What is a Buyback of Shares?

A buyback (or share repurchase) is a corporate action where a company buys back its own shares from existing shareholders, usually at a price higher than the market value.

After the buyback, the number of outstanding shares decreases, which can increase the earnings per share (EPS) and ownership percentage of remaining shareholders.

Legal Basis in India:

• Governed under Section 68–70 of the Companies Act, 2013 and SEBI (Buyback of Securities) Regulations, 2018 (for listed companies).
• Approval is required from the board or shareholders, depending on the size of the buyback.
• Buyback can be done from:
  1. Existing shareholders on a proportionate basis,
  2. Open market,
  3. Employees holding shares under ESOPs, or
  4. Odd-lot holders.

Earlier Framework (Before 1 October 2024)

• Buyback Tax: Companies were liable to pay a 20% tax (plus surcharge and cess) on the distributed income from share buybacks under Section 115QA of the Income Tax Act.
• Investor Treatment:
  • Shareholders received the buyback proceeds tax-free.
  • No further tax liability in the hands of investors.
• Rationale: This system was introduced in 2013 to prevent companies from avoiding Dividend Distribution Tax (DDT) by resorting to buybacks.

New Regime (From 1 October 2024 Onwards)

• Tax Shift:
  • The 20% buyback tax on companies has been abolished.
  • The entire buyback amount is now taxable as dividend income in the hands of shareholders.
• Investor Taxation:
  • Taxed as per the individual’s applicable income tax slab rate.
  • For non-resident investors, TDS provisions under Section 195 apply.
• Objective: Simplify taxation and create parity between dividends and buybacks as forms of capital return.

Implications

• For Investors:
  • High-tax individuals face lower post-tax returns from buybacks.
  • Foreign investors may see withholding tax impacts depending on DTAA (Double Taxation Avoidance Agreement) benefits.
• For Companies:
  • May reduce preference for buybacks as a method of returning capital.
  • Could increase dividend payouts or share-based incentives instead.
• For Market:
  • Short-term dip in buyback announcements post-October 2024.
  • Potential rebalancing of corporate capital allocation policies.