Why hike in share buyback tax announced in the Budget hurts investors

livemint.com:

Companies reward shareholders by way of dividend payment or share buybacks. Both are done from tax-paid reserves and company profits. Such payments are also used as tools of wealth distribution and efficient allocation of capital.

For example, a company that’s in a mature business may not find viable opportunities to deploy all its cash earnings and may decide to return them to shareholders, who can then allocate these funds in better investments.

When slab taxation for dividends was introduced, it was met with feeble protests from the industry and investor community. Slab taxation of dividends means that for every ₹100 earned and distributed by a company, the company first pays ₹25 as corporate tax, and the shareholder pays an additional tax of anywhere between 10% and 37.5% on the taxed distributed profit. A clear case of double taxation.

For those in the highest tax bracket, effective taxation could be as high as 53.125%.

A handful of taxation experts did call out this double taxation and were hoping for a rationalisation of the same in the Budget 2024. Instead, it was a double whammy as finance minister Nirmala Sitharaman introduced tax on buyback proceeds in Budget.

Buyback proceeds will be deemed dividends and fully taxed in the hands of investors with no deductions, including the cost of the acquisition of shares.

Also Read: Mint Explainer: The budget, buybacks, and Esop taxation

Consider these examples:
 

Due to the disproportionately high tax on buybacks, retail shareholders will skip these issues if corporates still choose to have them. Only institutional investors like mutual funds, who pay no taxes or near zero tax, will participate. A promoter stake sale will attract capital gains for the promoter, but the