In the Union Budget 2019-20 speech, Finance minister proposed to provide that listed companies shall also be liable to pay additional tax at 20% in case of share buyback. Earlier, the tax implications were limited to unlisted companies only.
The reason behind is that to prevent from paying DDT (Dividend distribution tax) while declaring dividends, the promoters were using the buyback route to enhance their wealth and effectively increasing their shareholding in the company, which are liable to DDT. In a share buyback, a company will absorb repurchased shares and rename them as treasury stock.
(Also refer reason behind the taxation of buy back of shares: https://capage.in/reason-behind-the-taxation-of-buy-back-of-shares/)
Subhash Chandra Garg, Finance secretary, said the government will look into the applicability of tax @20%, proposed in the union budget on ongoing share buybacks. It is further clarified by him that the tax on the listed companies shares buy back was proposed to impose for the purpose of “discouraging buybacks and encouraging investment.”
He further added buyback route will be opted mainly by those companies that that have huge cash but see no investment opportunities. Therefore, the objective is to encourage investments by discouraging the buy back of shares.
A statement given by garg while asking if the government would consider grandfathering those share buyback 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 will discuss with revenue department”.