Union Budget 2019 has proposed to tax buyback of shares by companies at 20 percent. Prior to budget, 2019, The dividend distribution tax (DDT) was introduced in Union Budget 2007. Investors who receive the dividend do not have to pay tax, but the companies giving the dividend have to pay DDT to the government. The rate of DDT is 15 percent. (Grossing up is about to 20 percent). Investors with total dividends receipt in excess of Rs 10 lakh are also need to pay tax at the rate of 10 percent (plus surcharge and cess) from April 1, 2017.
Now, Instead of declaring dividends the promoters were using the buyback route to enhance their wealth and effectively increasing their shareholding in the company. In this process, the government, however was not getting paid the DDT, tax on dividends where a single investor was pocketing more than Rs 10 lakh. To overcome this, Union Budget 2019 brought in buyback tax at 20 percent. That would eliminate the loophole and promoters now have to pay tax irrespective of way they choose – be it dividend payout or the buyback.