The Finance Ministry on July 12 said that it will look into the applicability of 20 percent tax proposed in Budget 2019 on the going share buybacks by listed companies.
Finance Secretary Subhash Chandra Garg, speaking at a CII event, said the proposed tax on listed companies is aimed at discouraging share buybacks and encouraging investments.
Asked if the government would consider grandfathering those share buybacks which are already underway from the proposed levy, Garg said, “I am not in a position to say whether that (grandfathering) can work or not, but we will discuss it with the revenue department.”
In her Budget speech, Finance Minister Nirmala Sitharaman proposed that listed companies shall be liable to pay additional tax at 20 per cent in case of buyback of share, as is the case currently for unlisted companies.
The move was aimed at discouraging the practice of avoiding Dividend Distribution Tax (DDT) through buyback of shares by listed companies. DDT is paid by companies who distribute their profits to their shareholders in the form of dividends.
Garg said that buyback is mainly undertaken by those companies which have cash but see no investment opportunities.
“Our preference would be they invest so that there is no need to do a buyback. In this economy, how the buyback is being done in digital economy space, there also an enormous opportunity (for investment) to exist … Our objective was to close the arbitrage … the intent is to encourage investment,” he said.
Share buybacks offer a route for companies to return some wealth to their shareholders, while potentially boosting their stock prices. In a share buyback, a company will absorb or retire the repurchased shares, and rename them as treasury stock.
Buying back stock is also a route to make a business look more attractive to investors. By reducing the number of outstanding shares, a company’s earnings per share ratio are automatically increased.