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A major budget announcement, which has caught the attention of investors, is that capital gains tax will now be levied on share buybacks. Finance Minister Nirmala Sitharaman stated that buybacks will be taxed as capital gains for all types of shareholders. She also explained that an additional buyback tax will be imposed on promoters to prevent tax manipulation. This will result in an effective tax rate of 22% for corporate promoters and 30% for non-corporate promoters.

Why a capital gains tax on buybacks?
Addressing the media after the budget, Revenue Secretary Arvind Srivastava clarified that this move is not aimed at increasing taxes, but rather at providing relief. He said that previously, income from buybacks was considered dividend income and taxed accordingly. This has now been rectified. The change aims to prevent the misuse of tax provisions by promoters. The situation remains the same for promoters, while other investors will receive relief.

Pramod Batra, Partner at Deloitte India, said that capital gains tax has been reintroduced on share buybacks by companies. Promoters may face a tax of 22% to 30% (excluding surcharge and cess). This will force companies to reconsider their options between paying dividends and conducting buybacks.

Tax liability on shareholders
According to Roop Bhutada, Whole-Time Director at Anand Rathi Share and Stock Brokers, this change is beneficial for ordinary investors. The tax rate will come down from the highest slab of 30% to the capital gains rate (20% for short-term and 12.5% ​​for long-term). However, this is negative for companies and will encourage them to invest in capital expenditure or R&D instead of buybacks.

Vaibhav Gupta, M&A Partner at Dhruva Advisors, said that this change is good for retail and non-promoter shareholders. The overall tax rate for promoters has not changed, but they will now be able to adjust capital losses against income from buybacks. However, this could lead to a dispute with the tax department.

Additional tax on promoters
Typically, buyback tax is levied on companies that repurchase their shares instead of paying dividends. The purpose is to regulate the method of distributing profits. Overall, this change in buyback tax rules could impact investor behavior and market sentiment.

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