Will buyback tax discourage IT companies' structured buyback programs?

In the past two years, total cash returned to TCS shareholders comprised of 60 percent of share buyback and 40 percent of dividend payment. Wipro, on the other hand, has largely used buybacks - 90 percent of the payout in the past two years, the report said.

"Lots of companies especially high payout companies such as Wipro had shifted to do buyback than to pay a dividend. Now, with this taxation, they will be a shift back to dividends. Higher taxation is negative for listed companies," Abhimanyu Sofat, Head of Research, IIFL Securities Ltd told Moneycontrol.

Kotak said that the buyback program is done post the tax deduction on the excess cash and the imposition of the new tax on the dividends disbursed is likely to make huge dents in the profit of these companies.

"Consider a company with the post-tax yield on cash at 5 percent. The buyback would have been EPS accretive if done at anything less than 20X P/E multiple, i.e. inverse of yield on the excess cash balance. One has to take into consideration the additional tax burden of 20 percent, which effectively reduces the implied threshold P/E multiple to 16.7X (20X/120%) for the buyback to be EPS neutral," Kotak explained in the report.

There has been no change in the structure of DDT. The current rate of DDT is 15 percent (effective rate of 20 percent once it is grossed up and adjusted with surcharge and education cess). This dividend received is then tax-free in the hands of the shareholders.

"Any buyback of shares from a shareholder by a company listed on a recognised stock exchange, on or after July 5, 2019, shall also be covered by the provision of Section 115QA of the Act and have to pay tax at the rate of 23.30 percent," Suresh Surana, founder of RSM Astute told Business Standard. 

This would effectively create a roadblock for companies that have already announced a buyback offer or are in the process of doing so, the report said.