Share Buyback

Share Buyback

Subject :Economy

Context:

Sebi remarked-Peter is paying taxes on behalf of Paul.

Details:

• SEBI remarked related to the taxation rules on share buybacks under which companies are paying the tax on behalf of promoters from funds which belong to shareholders.
• Some of the larger companies such as TCS, GAIL and Zydus Life Sciences, which made large buyback offers in 2022 have paid significant amounts as tax for shares purchased by promoters.

Concept:

Share buyback:

• A stock buyback is when a public company uses cash to buy shares of its own stock on the open market. A company may do this to return money to shareholders that it doesn’t need to fund operations and other investments.
• Companies do buybacks for various reasons, including company consolidation, equity value increase, and looking more financially attractive.
• The downside to buybacks is they are typically financed with debt, which can strain cash flow.
• Stock buybacks can have a mildly positive effect on the economy overall.

Tax law on share buyback:

• Section 115QA of the Income Tax Act  introduced a buyback tax at the rate of 20 per cent to be paid by listed companies on the amount distributed by them during share buybacks.
  • Prior, the onus of paying tax on such income was laid on the shareholder.
• The current mechanism of buyback tax appears to be tilted in favour of those shareholders who tender their shares and take exit  from the company adversely impacting the interest of shareholders who do not wish to tender their shares under buyback. As a result, all the continuing shareholders have to share the burden of tax payable by the listed company on the buyback proceeds of the shares tendered by existing/tendering shareholders.

Dividend distribution tax and share buyback:

While tax on share buybacks have to be paid by companies, shareholders are responsible for paying tax on dividends received, following the abolishment of the dividend distribution tax in the Finance Act 2020.