29 May 2020
All investors will be subject to a single tax slab of 20 per cent in buybacks through a stock exchange platform.
How is the tax on company buyback of shares calculated? To understand the buyback of shares tax implications, we first need to understand the various scenarios and the tax implications under each of them. We also need to understand the tax implication of buyback of shares in case of listed and unlisted companies as well as in the direct buyback mechanism and the stock exchange buyback mechanism.
Assume that you had bought shares of company XYZ at Rs.800. After a period of 6 months you accepted the buyback offer by the company at Rs.1000. The profit of Rs.200 will be treated as short term gains as the shares were held for less than 1 year and taxed at the rate of 15 %. That is the simpler part of it. The real complication arises when the buyback results in long term capital gains in the hands of the shareholder (i.e. held for more a period of more than 1 year). Here are 5 things you need to know about taxation of buybacks.
Let us first look at listed companies. One way to do a buyback is to do a buyback directly from the shareholders of the company. In this case, even if the gain is a long-term capital gain, the tax on LTCG will be payable at the lower of the two (20 % with indexation or 10 % without indexation). That is because when there is a direct buyback from shareholders there is no payment of STT by the shareholders. So LTCG on buyback is taxable!
Alternatively, the company can also affect the buyback of shares through the stock exchange, in which case the STT becomes payable on the transaction. However, since the STT is already paid in this case, the long-term capital gains will be entirely exempt.
In both the cases above, the taxation incidence, if any, is only on the shareholder and not on the company. That changes when we talk about buyback by an unlisted company. In that case, the company in question is also liable to pay tax.
In case of unlisted companies, there is no tax imposed on the person who benefits from the buyback of shares irrespective of whether the gain from the buyback is short term gain or long-term gain. The entire buyback may have become slightly complicated after the Union Budget 2018 as now capital gains beyond Rs.1 lakh during a fiscal year will be taxed at 10 % without the benefits of indexation. This will be applicable from April 1st, 2018 but this is likely to largely take away from the attractiveness of buybacks, especially for promoters with large holdings in companies.
Buybacks had emerged as a smart tool for promoters and large investors to avoid the payment of huge taxes on dividends. However, with the introduction of the tax on LTCG without the benefit of indexation, the advantages of buyback of shares may have largely diminished.
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