Investors may have to shell out higher taxes for buybacks following Union Budget 2024 proposal

Govt tweaks Buyback tax structure

Investors participating in buybacks may have to shell out higher tax out of pocket while receiving the proceeds as the central government proposes to tweak the buyback tax rules.

Currently, buybacks are taxed in the hands of the company at 20 percent rate and investors were not required to pay any additional tax for such income. But going forward, the company will not deduct any taxes and all the income received by the investors will be treated as dividend and taxed as per the income tax slab of the investor.

The cost of acquisition of shares, which were bought back, will be available for investors as capital losses that can be carried forward for eight years and adjusted with any future capital gains tax liability. This means, the investor may end up paying higher tax out of the pocket and would not be able to avail the capital losses arising from acquisition price until the investor sells some shares and makes capital gains, say experts.

“The entire amount received on buy-back of shares would now be taxed as dividends in the hands of investors at ordinary rates as against the 20% buyback tax rate. The cost of acquisition of shares bought back will be considered as a capital loss, which will be eligible for set-off against other capital gains or carry forward. This makes the taxation of buyback more complex because the benefit of capital loss will be available only in future when the investor has earned other capital gains,” said Rajesh Gandhi, partner, Deloitte.

Tax experts say, the tax on such buyback may be unfair since the primary purpose of buyback is to return excess capital to investors. However, currently there is a tax arbitrage between dividends and buybacks which has prompted companies to use buyback route instead of dividends. Now, government has plugged the loophole.

“The buyback of shares going forward would be taxed at full rates as ordinary dividend income. Also, the amount invested will be available as a capital loss to be set off against the capital gains earned by the assessee. This amendment presumes that companies resort to buyback in lieu of dividends and take advantage of the tax arbitrage, as buy back is taxed at approximately 20%. This may not be right, as buyback are done to reduce and return excess capital,” said Punit Shah, partner, Dhruva Advisors.