The new rule has increased the tax liability of shareholders. For many shareholders, the tax rate has increased from the 23.29 percent previously paid by companies. Due to this, people falling in higher tax slabs may stay away from the share buyback program.
New tax rules related to share buyback have come into effect from October 1. The new rules were announced by Finance Minister Nirmala Sitharaman in the Union Budget . In the new rules, the tax burden has now shifted from the company to the shareholders. Now the gains from share buyback have been considered as dividend. This means that now it will be taxed according to the shareholder’s tax slab. Earlier, the company had to pay tax under section 115QA of the Income Tax Act, 1961. It had to pay about 23.29 percent tax.
Responsibility of paying tax is on shareholders
Experts say that the new rules have increased the tax liability of shareholders. For many shareholders, the tax rate has increased from the 23.29 percent previously paid by the companies. Those falling in the highest tax slab will have to pay more than 30 percent tax on the profit from share buyback. Due to this, the attraction of share buyback has ended for such shareholders.
Returns will decrease due to tax
As the responsibility of paying tax on share buyback has fallen on the shareholders, its post-tax returns have decreased. Experts say that now dividends are more beneficial for shareholders than share buybacks. Due to this, many investors may also change their investment strategy. They may show interest in investing in the shares of those companies which give higher dividends.
Companies will use the tax payment money elsewhere
The new rules will also affect companies. Now companies can use the money from tax payment on share buyback elsewhere. Experts say that companies can now use this money for their growth strategy. They can spend this money on business expansion, acquisitions and development of new products. This will also strengthen their balance sheet. Credit rating and financial ratios may also improve.
There will be an impact on the balance sheet of companies
Some experts say that since share buyback is no longer beneficial for shareholders, companies can now use the expenditure on it for R&D, technology upgradation and repaying debt. This will also have a good impact on the financial health of the company.
