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

Previously, only share repurchases by unlisted companies were subject to such a tax.

, ET Bureau|
Updated: Jul 08, 2019, 09.01 AM IST
Mumbai: The government’s budget proposal to tax buybacks by listed companies could affect at least half a dozen share repurchases worth Rs 10,000 crore that are already in progress. The list includes the Rs 8,600 crore share buyback by Infosys, which has already begun. Since these companies have fixed their offer prices already, they will not be able to make revisions to factor in the new tax. Experts said such companies will have to pay the 20 per cent tax themselves.

Previously, only share repurchases by unlisted companies were subject to such a tax. The measure is a part of anti-abuse provisions and aimed at curbing wrongful exploitation of the buyback route.

“The law does not provide any exemption for companies which have filed their prospectus with Sebi,” said Lokesh Shah, partner at law firm Luthra & Luthra. “Any buyback implemented on or after July 5, 2019, by listed companies is subject to the additional income tax, payable by the company, at an effective tax rate of 23.29 per cent consequent to the buyback.”

Although the Infosys buyback opened for public subscription on March 19, the new tax will still be applicable since the rules apply to any payment a company makes for buybacks after July 5. The Infosys buyback will close on September 20 after which the company will make the payout to shareholders.

Share buybacks of Welspun, SKP Securities and Star Cements among others are in the offing.

Tax experts are awaiting clarity on how the buyback tax will be calculated. Currently, the tax on unlisted companies is calculated on the basis of the difference between buyback and issue prices. The government has extended the same formula for listed companies but that doesn’t take into consideration the fact that listed shares are frequently traded. Experts said tax should be calculated on the cost at which investors bought the shares and not the original issue price.

“Buyback tax is payable on the difference between buyback price and the price at which shares are issued by the company,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates. “As of now, the way the section is worded, for calculating the amount on which the tax is applicable, the purchase price of investor would not be taken into account and hence could lead to potential double taxation to that extent.”

For investors, buybacks will be beneficial as they will not have to pay capital gains tax on these shares. Until now, gains made from buybacks were subject to capital gains tax in the investor’s hand. Now, companies will have to deduct the tax based on the amount payable on account of share repurchases.

The government extended applicability of the new tax to listed entities since several companies were using buybacks instead of high dividends to return money to shareholders. In 2007, the government had introduced 15 per cent tax on dividend distributed by listed companies. This tax is deducted by the companies based on their total dividend payout. The FY16 budget saw the introduction of additional dividend tax (ADT), which applies to any individual getting dividends worth more than Rs 10 lakh in a financial year. ADT, unlike dividend distribution tax, is charged in the hands of investors.

“Buybacks were also being used by promoters to shore up their shareholding and acted as a method used for stalling the fall in prices,” said Tomu Francis, partner, Khaitan & Co. “The route will now become relatively expensive.”

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