FM's tax cut: Buyback relief for firms as retrospective rule goes

Finance Minister Nirmala Sitharaman (Photo: PTI)
The government’s decision to not impose the new buyback distribution tax on companies that had already announced their repurchase programme prior to the Union Budget has come as a big relief for India Inc.

While the 20 per cent tax was announced in the Union Budget, it was applicable retrospectively from April 1, the start of a new financial year.

Buybacks worth nearly Rs 15,000 crore by nearly 20 companies, including Wipro and Adani Ports & SEZ, were hit by the unexpected move.

On Friday, Finance Minister Nirmala Sitaraman said listed companies that had announced buyback before July 5, the day of the Union Budget, will be exempt.

Experts said the move provides much-needed clarity on the fate of buybacks that were hanging in balance since the introduction of the tax.

“No buyback tax on offers announced pre-July 5 is a welcome move. It provides clarity to companies on applicability of the tax on their buyback offers which had been announced before the Budget proposal,” Niranjan Govindekar, partner- tax and regulatory services, BDO India.

Frank D'Souza, partner and leader corporate and international tax, PWC said the relief on buy-back tax, will help address past concerns.

The near three-month time between the budget and relief, however, had put many companies in a spot.

Some smaller companies, including KPR Mill had to withdrew their buyback plans even as legal experts questioned that validity of the move. Others such as Greaves Cotton and SKP Securities wrote to market regulator Securities and Exchange Board of India (Sebi) seeking clarity on whether they can cancel or revise the terms of their buybacks.

Sources said Sebi raised the various complications created by the retrospective applicability of the buyback tax with the Finance Ministry.

“Many companies had raised valid issues with Sebi over the new buyback tax for which there were no easy solutions. Sebi forwarded all the queries to the government. On one hand companies were fair to seek cancellations. On the other hand, it would have impacted public shareholders, who possibly bought shares after the announcement was made,” said a legal expert adding that the latest move provides relief to all the stakeholders.

Experts said many companies will be able to set the ball rolling again on their buybacks. Also, companies that announce buybacks going ahead will factor in the new tax.

The buyback tax was introduced in the budget to plug the tax arbitrage between dividends and buybacks.

Since the introduction of the 10 per cent the additional dividend distribution tax (DDT) in 2016-17, many companies had started rewarding their shareholders by way of buybacks. Following the tax, effective tax rate on dividend payouts had become 20.6 per cent. The new buyback tax, many say, level the playing field.

Companies that set the ball rolling on buybacks before tax change
Company Board approval date Proposed amount (Rs cr)
Wipro Tuesday, April 16, 2019 10,500
Adani Ports Saturday, April 06, 2019 1,960
BSE Friday, July 05, 2019 459
Welspun Corp Tuesday, May 14, 2019 390
KPR Mills* Monday, April 29, 2019 263
Greaves Cotton Tuesday, February 05, 2019 227
Sasken Technologies Tuesday, April 23, 2019 169
Responsive Industries Wednesday, October 17, 2018 159
Star Cement Friday, June 21, 2019 102
Eris Lifesciences Thursday, March 07, 2019 100
Triveni Engineering Wednesday, March 06, 2019 100
Vaibhav Global Thursday, May 30, 2019 72
Smartlink Holdings Friday, June 14, 2019 55
Gandhi Special Tuesday, May 28, 2019 49
Elegant Marbles Tuesday, May 28, 2019 16
SKP Securities Saturday, April 27, 2019 7
Vyapar Industries Friday, June 21, 2019 5
*Withdrawn; Source: Prime Database

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