From April 1, 2020, the government, while removing 10 per cent tax on dividend distribution, said dividends will be taxed at the hands of shareholders. As a result, promoters and other high shareholders, have to pay a tax of more than 40 per cent — the highest tax slab — on dividends.
Some believe the choice between buybacks and dividends under the current tax regime isn’t that simple.
“With the change in the taxation of the dividend regime, whereby shareholders are taxed directly, instead of tax being paid by the distributing company, dividends will be preferred from a tax perspective, especially by a non-resident shareholder as some of the tax treaties provide for a tax rate as low as 5 per cent. However, resident shareholders continue to be taxed at high rates on dividend income and hence, will prefer buyback as a route to receive distribution,” said Indruj Rai, partner, Khaitan & Co.
Market observers say cash-rich firms with high promoter holding may increasingly look at buybacks this year. Besides, being tax-friendly for promoters, buybacks also boost financials, which is another positive.
“A buyback, much like a dividend distribution, fundamentally works to improve investor confidence. Given that any commercially viable buyback will be offered at least at a reasonable premium to prevailing market prices, it signals to the market at large that the company has, and expects to continue having, strong financials in place. Besides, the immediate financial result of a successful buyback is a net positive for the company — as its earnings per share automatically increase,” said Vaibhav Kakkar, partner, L&L Partners.