By moderator July 15, 2019 12:40

The Big Picture – Tax on Share Buyback

Well, the Finance Ministry said that it will look into the applicability of approx 20 percent tax proposed in the year of 2019-20 Budget on the current share buybacks by the listed companies. The Finance Secretary Subhash Chandra Garg, speaking at a CII event, said the proposed tax on the listed companies is aimed at discouraging share buybacks and also encouraging investments. However, the Finance Minister Nirmala Sitharaman in her 2019-20 Budget speech proposed to provide that the listed companies shall also be liable to pay additional tax at 20 percent in case of share buyback, as is the case currently for unlisted companies. 

The share buybacks offer a route for the companies to return some wealth to their shareholders, while potentially boosting their stock prices. In fact, in a share buyback, a company will absorb or retire the repurchased shares, and also rename them as treasury stock. 

Why has the tax been proposed?

  • The companies are required to pay the Dividend Distribution Tax on the distributed income. But, the companies were seen to be buying back the shares in order to avoid the DDT. 
  • Thus, the government introduced Section 115QA in the Income Tax Act, 1961 in the year of 2013 which was a tax on the distributed income on the buyback of shares. But it was applicable only to unlisted companies.
  • In the year of 2018, approx 50,000 crores were invested by the listed companies in buying back the shares evading almost 10000 crores.  
  • So, the Finance Minister, while introducing the Budget, brought in the provision to cover listed companies as well. The provision was introduced with the intent that companies with surplus cash should invest rather than buying back the shares. 

Why do large corporates not invest money?

  • It is widely known that companies can generate more profits with more investments. It would also help in job creation in the economy. 
  • But, there are certain business models where continuous investments are not possible. Such companies increase their wealth through buyback of shares.  

Benefits of the new tax

  • To achieve the aim of becoming a $5 trillion economy by 2022, India needs resources. The imposition of tax on rich companies is one way of acquiring them.
  • It would provide a level playing field for the unlisted and the listed companies.
  • The tax would make companies be cautious on share buybacks and instead make them give more dividends to shareholders who may invest the money and contribute to the economy through job creation.
  • It may also prompt companies to diversify into other sectors to invest their surplus cash. The diversification would also contribute to job creation and help in increasing demand and GDP of the economy.

Way forward

  • The government may take a step forward and communicate to the cash surplus companies to use their surplus cash to diversify into other sectors which have the potential to create jobs.
  • Incentives and an appropriate environment for the companies may also be given to motivate them to diversify into other areas.
By moderator July 15, 2019 12:40