Share buybacks no longer to woo investors: here’s why
Buybacks will lose their sheen for investors as the income on them will now be taxed in the hands of the recipient i.e. the investor at the applicable slab rate which can be higher than the earlier 20 per tax rate on buybacks for companies.
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A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake.
What has been changed in relation to share buyback in the latest budget
In Budget 2024, the FM has put forth a proposal to tax income received on buy back of shares in the hands of the recipient. This is to deepen the tax base as mentioned in the Budget speech. Explaining how share buybacks will be taxed henceforth Kirang Gandhi- Personal finance mentor highlighted that under the new regulations announced in Budget 2024, buyback income will now be treated differently from dividends. Previously, companies conducting buybacks were required to pay a buyback tax at a rate of 20% on the distributed income, making the buyback income tax-free for investors.
Going forward, starting from October 1, 2024, the amount paid on buyback will be treated as a dividend and taxed in the hands of the shareholders. Investors will need to include the buyback proceeds as dividend income, which will be subject to tax as per their applicable tax slab. Additionally, the cost paid by the shareholder to acquire those shares will be considered for the computation of capital gains or losses. This change aligns the tax treatment of buybacks with that of dividends.
Experts decode the change
Putting more light on the change, Narendra Solanki, Head Fundamental Research - Investment Services, Anand Rathi Shares and Stock Brokers said earlier the tax on buyback was paid by the company but now the burden of tax has shifted on investors which adds more complexity and also increases the burden. Now the buyback will be taxed as dividends and on tax slab, he adds.
Kirang Gandhi- Personal finance mentor said the 2024 Budget increases taxes on share buybacks, reducing their attractiveness. Companies face higher tax burdens, leading to lower net earnings and potentially less frequent buyback announcements. This diminishes the signal of management confidence and limits the reduction in share count, affecting stock prices.
Investors receive lower after-tax returns, making dividends or growth reinvestments more appealing. Increased market uncertainty and volatility may result, with potential capital outflows if Indian markets appear less competitive globally. Overall, higher buyback taxes deter investors by impacting company valuations, investor returns, and market sentiment, added Gandhi.
Atul Parakh, CEO of Bigul added that wahile the new tax structure aims to remove the arbitrage between dividends and buybacks, the higher immediate tax cost may deter some investors from participating in buybacks, potentially impacting the success rate of these programs. Companies may need to raise buyback prices to compensate
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