Buyback resulted in tax on resident shareholders in form of capital gains, says Dhruva Advisors

Anil Agarwal of Vedanta said that the government’s move to remove the buyback tax of 22 percent could spur the morale of India Inc to come out and buy its own shares because they know that it is under priced.

Discussing this developments further, Dinesh Kanabar, CEO of Dhruva Advisors said, “History suggests that there was a dividend distribution tax (DDT) and companies which got tax-free income like the BPOs, the IT-enabled companies did a buyback. The buyback resulted in taxation for those who are resident shareholders because it was capital gains in their hands, whereas the capital gains which accrued to non-resident shareholders – if they came from treaty protected companies like Mauritius, Singapore because of the treaty exemption there was zero capital gains tax. So it resulted in zero tax for non-resident shareholders and a capital gains tax for resident shareholders. That was at 20 percent, given the fact that this would not happen on the stock exchange,” he said.

“Now that the government has done up with the DDT, the question arises as to whether a buyback tax is warranted at all or not, and if the buyback tax is taken out, again we will have a situation of capital gains tax where resident shareholders will then need to take capital gains tax and non-resident shareholders particularly will be able to take money out depending on the tax treaties that they are looking at,” he added.