Amount paid on share buyback to be treated as dividend and taxed in hands of shareholders: FM

Finance Minister Nirmala Sitharaman on Tuesday said buyback of shares will be taxed in the hands of shareholders similar to dividend from October 1, a move that will increase the tax burden on investors.

Further, the cost paid by the shareholder to acquire these shares will be considered for computation of capital gains or loss to them.

"For reasons of equity, I propose to tax income received on buyback of shares in the hands of the recipient," Sitharaman said in her Budget speech.

It has been proposed that the income from buyback of shares by companies be chargeable in the hands of the recipient investor as dividend, instead of the current regime of additional income-tax in the hands of the company.

Further, the cost of such shares will be treated as capital loss to the investor, she added.

Experts said the government move can increase the burden on investors, besides, there might be a decline in the number of buybacks.

"The taxation of buyback as dividends may potentially increase tax burden on investors. Hitherto, it is taxed at 20 per cent but after the amendment, the taxpayers in higher tax bracket will have to shell out more tax," Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm, said.

He said the buyback was consistently being used as a tool for tax arbitrage but its use was limited due to restrictions under the Companies Act.

Henceforth, companies will be now using it only wherever they genuinely feel the need for capital reduction and not for distribution of profits.

The buyback option was among the final avenues for investors to exit a company without incurring tax liabilities, as the tax was previously paid by the company.

"Going forward, we may see a reduction in the number of buybacks, with companies possibly choosing to allocate surplus funds towards capital expenditures instead," Roop Bhootra, CEO -- Investment Services, Anand Rathi Shares and Stock Brokers, said.

Kotak Securities COO Sandeep Chordia said capital loss generated on buyback will be allowed to be set off against other capital gain.

Price Waterhouse & Co LLP Partner Kamal Abrol said until now the tax regulations provided that buyback would be taxed differently from dividends and the company was under obligation to pay the taxes to buy back.

"Going forward, the amount paid on buyback would be treated as dividend and taxed in the hands of the shareholders.

"The cost paid by the shareholder to acquire those shares will be considered for computation of capital gains/loss to them.

"This change comes into effect from October 1, 2024," he added.

Dhruv Chopra, Managing Partner, Dewan P. N. Chopra & Co, said the proposal to tax buyback of shares by domestic companies in the hands of shareholders will potentially bring parity between tax implications on declaring dividends and buyback.

"Historically, shareholders have enjoyed the benefits of a lower tax implication on buyback with savings of about 12 per cent on distribution of profits by companies in the form of buyback vs dividend.

"This benefit may no longer be available to shareholders," he added.

Union Budget 2024: Complete Coverage