Share Buyback Tax: Share buyback taxation is set to change. According to the amendments in the Finance Bill, a 12 per cent surcharge will be charged on capital gains earned on share buyback. The 12 per cent charge will be flat and will come into effect from April 1.
This will apply to both individual and corporate shareholders.
The amendments in the Finance Bill were approved by the Lok Sabha on Wednesday (March 25).
A flat 12 per cent surcharge on capital gains from share buybacks will significantly raise the effective tax cost. Earlier, a lower surcharge structure was applied.
Currently, no surcharge is levied on taxable income up to Rs 50 lakhs, while taxable income between Rs 50 lakhs and Rs 1 crore attracts a 10 per cent surcharge on capital gains from buybacks.
"Moving to a flat 12 per cent surcharge means higher tax outgo across these brackets, making buybacks a costlier route for cash extraction compared to alternatives such as dividends. This is likely to discourage individual shareholder inclination for buybacks and distort capital allocation decisions," Sandeepp Jhunjhunwala, M&A Tax Partner at Nangia Global Advisors, said.
The impact of the change will be limited to small and mid-sized buybacks. Large buybacks, where gains exceed Rs 1 crore, are already subject to a higher surcharge rate of 15 per cent.
The amendment implies a 3 per cent reduction in surcharge for large buybacks. Where taxable income falls between Rs 1 crore and Rs 10 crore, a 7 per cent surcharge is applied.
"In both scenarios, the shift to a uniform 12 per cent surcharge increases the overall tax burden, thereby making buybacks relatively more expensive," Jhunjhunwala said.
