How are share buybacks taxed in India?

A typical activity in the financial markets is share buybacks. A share buyback occurs when a publicly traded company uses the money to buy shares of its own stock on the open market. For this aim, the corporation makes investments with money that was not used to fund operations.


All stockholders can participate in a stock buyback, and it is not designed to single out any one class of investors.


44 buybacks of 18,703 crores took place in the current fiscal year up until December 31, 2022, according to a Financial Express article quoting sources. One97 Communications, MOIL, and Tata Consultancy Services are a few of the businesses that made repurchase announcements last year.


share buybacks


In light of these changes, the finance ministry is looking at a strategy to shift the tax liability for share buybacks from corporations to the individual shareholders who participate in the transaction. According to Financial Express, the goal is to tax share repurchases similarly to how dividend income is taxed.


Let’s talk about how share buybacks are now taxed in India to better comprehend this.


In the case of an unlisted company

Buybacks of shares by unlisted companies are subject to a 20 percent flat tax under Section 115QA of the Income Tax Act on the “distributed income.” The amount the company made after deducting the price it paid to issue the shares from the price it paid to purchase them back is known as distributed income.


The primary goal of taxation was to prevent foreign firms from claiming tax treaty benefits on capital gains by preventing them from repurchasing shares instead of declaring dividends, which would have resulted in tax-free capital gains for the corporations.


While buyback tax was introduced on unlisted firms in 2013, the provision was expanded in July 2019 to include all corporations, including publicly traded ones.


In the case of a listed company

There are two possible ways to carry out the repurchase if the company is publicly traded. The first choice is the offer tender procedure, whereby the shareholder transfers his shares directly to the business in response to an offer made by the business at a particular price. When adopting the offer tender procedure, there is no double taxation because the company pays the repurchase tax and the shareholder would not be subject to capital gains taxes.


share buybacks


The second choice is to go through the open market when the business releases a statement and buys its own shares at a price that doesn’t go over a certain level.


Since these market transactions are similar to any other and are conducted through the stock exchange trading platform, the seller of the shares is uninformed of who the buyer is—whether it is the company that is buying back its shares or an investor. As a result, the seller of the shares would still be liable for paying capital gains tax on the sale of the shares even if the company would be paying the buyback tax on the shares it has repurchased.


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This issue of taxation primarily results from the intrinsic traits of the open market approach, where buyers and sellers are both anonymous.


To tackle this concern, many market participants have proposed to transfer the tax responsibility from the businesses to investors. The present system of double taxing repurchase proceeds, where shareholders additionally pay capital gains taxes on the gross amounts received, will no longer apply in case of a change in tax responsibility.