Companies race against tax time to issue buyback calls

MUMBAI: Companies are moving fast to buy back shares before the new tax rules proposed in the Budget come into effect from October 1. This will tax the buyback amount in the hands of the shareholders as per their tax slab. Currently, such transactions are taxed at around 23% at the company level.

In just three weeks after the budget announcement on July 23, 15 companies have announced buybacks, compared to 18 companies that did so between January 1 and July 23.

Indus Towers announced a share buyback of ₹2,640 crore on July 30. AIA Engineering did a ₹500 crore buyback on August 7. Apart from this, companies like Welspun Living, TTK Prestige, Cera Sanitaryware, VLS Finance, Navneet Education and Dhanuka Agritech have announced share buybacks in the last three weeks.

Tax Age vs Dividend Payout

Market experts expect many more companies to announce buybacks in the coming months, saying they will drop significantly from October 1.

“Share buybacks may pick up slightly till the end of September due to their tax efficiency compared to dividends, which will end on September 30,” said Satyen Shah, president and head of Nuwama Investment Banking. “From October, buybacks will still happen but undervalue the company and management uses the extra cash to buy back shares and in turn increase their earnings compensation ratio as the shares bought back expire.”

Gaurav Dua, head of capital markets strategy at Sharekhan by BNP Paribas, said the buyback would not provide tax benefits from October.

“Currently, share buybacks are more tax-efficient for corporates compared to dividend payments and as a result, many companies are looking to take advantage of this opportunity before the tax benefit ends on October 1,” he added.

As per the changes made in the budget, from October 1, tax on share buyback will be paid by the receiving shareholder as per the tax slab. Here, the tax is on the entire buyback money while the cost of acquiring the shares will be recorded as a capital loss, which can be used to offset future gains from selling other shares.

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Other companies that have announced buybacks since July 23 include Symphony, Chaman Lal Setia, Mayur Unicoaters, Savita Oil Tech, Ladderup Finance and Arex Industries. The board of Technocraft Industries will meet on Tuesday to consider the share buyback proposal.

“In the past, changes in dividend taxation have resulted in changes in payout ratios and I expect something similar to happen with buybacks,” said Jayesh H, cofounder of Juris Corp Advocates & Solicitors. “It’s not like buybacks will stop after Oct. 1. It’s not like buybacks, where buybacks were mostly motivated by cash transfers at the company’s expense (carrying taxes), will decrease dramatically.”

When the tax on dividends shifted to the company in 2003, payouts increased, including the percentage of profits available for dividends. This was happening because the largest shareholders no longer had to pay taxes themselves. When taxation shifted back to the recipient in April 2020, the dividend payout ratio fell.

According to Juris Corp’s Jayesh, some foreign promoters may continue share buybacks as Double Taxation Avoidance Agreements (DTAAs) can give them the benefit of lower tax rates. “This means that Indian shareholders, who do not have the same tax benefits, will bear an additional tax burden,” he said.

While listed companies are required to have a stated dividend policy, there is no such requirement on buybacks.