dividend distribution tax: It’s double taxation: Share buyback tax should go, like DDT, says TV Mohandas Pai in a BCIC report – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/policy/its-double-taxation-share-buy-back-tax-should-go-like-ddt-says-tv-mohandas-pai-in-a-bcic-report/articleshow/88332271.cmsSynopsis

The buyback taxation should go just like the MoF did with the dividend distribution tax (DDT) that companies paid earlier, they said. “Shareholders tendering shares under the tender route should be made liable to pay capital gains tax. Consequently, shareholders will be liable to pay either income tax on dividend income or capital gains tax on buyback of shares,” the two taxation experts said in a Bangalore Chamber of Industry & Commerce (BCIC) report, highlighting the measures the MoF should take to overhaul India’s direct and indirect tax systems and processes.

The Ministry of Finance (MoF) must withdraw buyback tax that listed and unlisted companies have to pay on purchase of shares through the tender route or open market transactions, Aarin Capital Partners chairman TV Mohandas Pai and tax consultant S Krishnan have said in a set of suggestions to the ministry for improvement of the capital gains tax regime.

The buyback taxation should go just like the MoF did with the dividend distribution tax (DDT) that companies paid earlier, they said. “Shareholders tendering shares under the tender route should be made liable to pay capital gains tax. Consequently, shareholders will be liable to pay either income tax on dividend income or capital gains tax on buyback of shares,” the two taxation experts said in a Bangalore Chamber of Industry & Commerce (BCIC) report, highlighting the measures the MoF should take to overhaul India’s direct and indirect tax systems and processes.

Pai is a former board member of Infosys, while Krishnan headed international taxation at the IT company.

Buyback tax should not be imposed on listed and unlisted companies on the repurchase of shares under any route, they said. When companies buy back shares through the stock exchanges under the open-market route, selling shareholders are anyway required to pay capital gains tax. So, there is no need for companies to pay buyback tax, Pai and Krishnan said.

Companies that have a distributable surplus have an option to distribute the surplus through dividends or repurchase of shares. The government, in 2013, introduced the buyback tax as an anti-tax avoidance measure when many unlisted companies resorted to buy back shares to avoid payment of DDT. As a result, unlisted companies had to either pay DDT on payment of dividends or a tax on the buyback of shares.

The government extended the buyback tax to listed firms from July 2019. Both listed and unlisted companies are now required to pay the tax at 20% plus surcharge at 12% and health and education cess of 4%, aggregating to 23.30% of the ‘distributed income’.

In April 2020, the government abolished the DDT and introduced a withholding tax on payment of dividends by companies. As a consequence, shareholders are now required to pay income tax on dividend income.

“This creates an anomaly. When companies pay dividends, there is no tax impact on them since DDT is withdrawn, whereas when the same reserves are used to buy back shares, companies are required to pay buyback tax,” they said.

There is anonymity of selling shareholders in case of open market purchases. Shareholders sell shares and the company buys those in the open market. “There is no linking between the two. Consequently, shareholders pay capital gains tax on sale of shares and companies pay buyback tax on the same transaction, leading to double taxation,” Pai and Krishnan pointed out.

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