Companies seek clarity on buyback tax from finance ministry

With the additional tax on dividends, companies had found share buybacks a more optimum route to distribute surplus cash to shareholders (Mint)

Mumbai: Blindsided by the government’s budget proposal to tax share buybacks by listed companies at 20%, a couple of listed companies that had announced their buyback plans before the budget have written to the finance ministry seeking clarity on the application of the tax on their buyback offerings.

Exchange filings show that in the last one week at least two companies have approached the ministry of finance and markets regulator Securities and Exchange Board of India (Sebi) seeking clarity on the applicability of the buyback tax on their offerings, which had been announced before the Budget proposal on 5 July.

Companies that have sought clarity on the tax include Greaves Cotton Ltd and SKP Securities Ltd, which together are looking to buy back shares worth 235 crore.

“The company has made a representation before the Ministry of Finance seeking clarifications amongst others, on the applicability of the proposed tax on the Company, as the company has prior to the introduction of The Finance (No .2) Bill 2019 made the Public Announcement and submitted the Draft Letter of Offer to Sebi without envisaging or providing for the effect of Buy-Back Tax,” said SKP Securities in an exchange filing on Monday.

SKP Securities has also sought guidance from Sebi on whether the buyback can be postponed or cancelled in view of the buyback tax announcement made subsequent to the commencement of buyback period.

Greaves Cotton made a similar filing with stock exchanges on 16 July.

Share buybacks gained prominence with listed companies after the government introduced a 10% tax on shareholders earning more than 10 lakh through dividends, in addition to the 20% dividend distribution tax charged to the company. The 10% additional tax was introduced in the 2016 Union Budget.

With the additional tax on dividends, companies found share buy backs a more optimum route to distribute profits and surplus cash to shareholders.

In the past three years publicly traded firms bought back shares worth 1.43 trillion.

To be sure, on 12 July The Hindu Business Line, citing Finance Secretary Subhash Chandra Garg, reported that the government is looking into the applicability of the buyback tax including the possibility of grandfathering of share buybacks that are already under way.