CashNews.co
NEW DELHI: Industry representatives have recently submitted representations to the finance minister, urging a reconsideration of new taxation rules concerning the buyback of shares. The 2024 Union Budget imposed up to a 39% tax on shareholders who sell their shares back to the companies, treating this transaction as dividend income.
Previously, companies would face a buyback tax of 23%, but new provisions have shifted tax burden onto individual shareholders, which the industry claims to be unfair and inequitable. Experts argue new tax rate is disproportionately higher as gainst long-term capital gains tax (LTCGT) of 12.5% and short-term capital gains tax (STCGT) of 20%, which apply when shares are sold to other buyers.
The Direct Tax Committee of the PHD Chamber of Commerce and Industry has raised key concerns regarding implications of the new buyback tax. As per them, there is a major issue concerning tax classification. Share buyback is currently classified as a transfer of a capital asset, and many believe it should be taxed as capital gains rather than as income. This view holds that taxing buybacks as dividends contradicts established tax principles.
Another concern is unequal treatment of shareholders. The stark difference in tax rates is troubling; shareholders face up to 39% tax when selling shares back to the company. This discrepancy makes the buyback option less attractive for investors.