One of the general principles to be followed in tax laws is that there is no double taxation on equal income. An exception to this is with respect to company profits, where most countries follow the classical system of dividend taxation, whereby company profits are first taxed in the hands of the company, and dividends are taxed again in the hands of shareholders. Is. Until the early 1990s, partnership profits were also subject to double taxation, which was abolished in 1993. Today, apart from dividends, there is no double taxation for almost all investment income. An exception is double taxation on buyback of shares of companies listed under the market route.
Earlier, on buyback of shares, the shareholder was subjected to capital gains tax. A buyback tax of 20% was introduced in 2013, payable on buybacks by an unlisted company, exempting shareholder capital gains. This was primarily done to prevent foreign companies from claiming tax treaty benefits on capital gains, whereby invested companies would not declare dividends, but would buy back shares, resulting in tax-free access for foreign companies. There will be capital gains. In July 2019, this provision was extended to all companies including listed companies for buybacks.
In case of listed companies, buybacks can be done in two different ways. One is the offer tender route, where the shareholder assigns his shares directly to the company in response to an offer received from the company at a particular price, and the other is the open market route, where the company makes an announcement and makes its own purchases. Shares in the open market at rates not exceeding a specified price.
Under the offer tender route, there is no double taxation, as the company pays buyback tax, and the shareholder will claim exemption from capital gains. The problem arises under the open market route, where the company acquires shares in the open market at current market prices (subject to caps). Since these are market transactions like any other that are executed through a stock exchange trading platform, the seller of shares is not aware of the identity of the buyer – be it the company that is buying back its shares. Yes, or some investors. Therefore the seller of shares will continue to pay capital gains tax on the sale of his shares, even though the company will pay buyback tax on the shares bought back.
The amount of tax paid by each will of course vary. While the company will pay tax on the difference between the buyback price and the price at which the shares were issued (regardless of the cost of the shares to the seller, who may have purchased them at a price very different from the market), the shareholder will pay the sale price (effectively will pay capital gains tax on the difference between the buyback value) and its actual cost value. Of course, there may also be situations where buyback tax is payable by the company, but no capital gains tax is payable by the shareholder due to the stock being sold at a loss.
Therefore this element of double taxation arises mainly because of the nature of the open market route, where buyers and sellers are anonymous. This may perhaps be settled by a process whereby, after the execution of the transaction, the company’s broker marks such transactions on the stock exchange system as part of the buyback, and the seller is also notified that his sale is part of the buyback. Is part of. company. The seller can then claim the discount accordingly.
Many companies still prefer the open market route over the open offer route, as it offers more flexibility and advantages. For the same buyback amount, under the open market route, a company may be able to buy back a larger number of shares, or an equal number of shares at a lower price, due to market price fluctuations.
But the big question is, is there a need for such buyback tax now? The buyback tax was introduced at a time when capital gains were tax exempt under the Mauritius and Singapore tax treaties. These exemptions have since been abolished. Various anti-treaty buying measures have been introduced. Therefore, with no exemption for capital gains under tax treaties, most foreign companies pay tax at 10% on their capital gains in India. Therefore foreign investors would not be interested in trying to repatriate the profits of the invested companies in the form of capital gains instead of dividends.
Also, do Indian investors face potential double taxation due to cross-border tax benefits enjoyed by foreign investors? With tax treaty benefits almost completely abolished, perhaps it is time for the government to seriously consider abolishing the buyback tax and subjecting investors to capital gains tax on buybacks of shares on their actual gains. It will also help in simplifying an already complex law.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.