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7 stocks that have taken an instant hit from buyback tax

Union Finance Minister Nirmala Sitharaman on Friday imposed a tax on buyback of shares.

, ETMarkets.com|
Jul 08, 2019, 03.01 PM IST
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Over the past three years, domestic IT companies have stepped up payout ratios and used a mix of dividend and share buybacks to return profits to shareholders.
The new tax on share buybacks has hit Infosys and seven other companies straightaway, as repurchase offers of these companies are currently open.

Union Finance Minister Nirmala Sitharaman on Friday imposed a tax on buyback of shares. As a result, eight listed companies, whose buyback offers are open, would now need to pay tax at the rate of 20 per cent plus surcharge and cess on the amount of consideration paid less the issue price of such shares.

The companies that have taken the unexpected hit included IT behemoth Infosys, Orbit Exports, Aurion Pro Solutions, Action Construction Equipments, Nava Bharat Ventures, GE Shipping and GEECEE Ventures.

Over the past three years, domestic IT companies have stepped up payout ratios and used a mix of dividend and share buybacks to return profits to shareholders.

For instance, out of the total cash returned to shareholders by TCS in last two years, 60 per cent was done through buyback and 40 per cent through dividend. Wipro has largely used the buyback route after an increase in the dividend distribution tax. Nearly 90 per cent of the company’s payout in last two years was through share buybacks.

“The amendment leads to taxation of at least 20 per cent on payout to shareholders, which is a disincentive. This tax is effectively an alternative form of income-tax,” Kotak Institutional Equities said in a note.

In her maiden Budget speech, FM said, “In order to discourage the practice of avoiding dividend distribution tax (DDT) through buyback of shares by listed companies, it is proposed to provide that listed companies shall also be liable to pay additional tax at 20 per cent in case of buy back of share, as is the case currently for unlisted companies.”

The statement implied buyback tax has now been extended to listed companies as well. Correspondingly, investors will not have to pay any tax on capital gains on buyback as this is now exempted.

The proposed provisions came into effect in respect of buyback undertaken from July 5, 2019.

Also Read

Exemption from share buyback tax major relief to IT bigwigs

Firms may save $1 billion from buyback tax exemption

Buyback tax: Infosys, others may have to pay 20% levy themselves

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