Ever since P. Chidambaram, the United Front government’s Finance Minister, introduced in 1997 Dividend Distribution Tax (DDT) under section 115O payable by companies, industrialists, in particular, had been getting away with a 15 percent plus vicarious tax on a substantial part of their income, a slap on their wrists because had dividend been taxed in their hands, they would have had to cough up nearly double. That together with Securities Transactions Tax (STT) in lieu of long-term capital gains tax made from recognised stock exchanges in India virtually and ironically removed company promoters from the already shrunken list of taxpayers in the country.
The Modi government has substantially corrected this grotesque slant by first imposing a 10 percent tax on long-term capital gains from bourses in excess of Rs 1 lakh and then scrapping the invidious DDT vide Finance Act, 2020. Dividend now is taxable in the hands of the recipients as it should be, given the cardinal principle of taxation i.e. tax the ultimate beneficiary.
Promoters are reorienting their reward strategies with dividend threatening to burn a gaping tax hole in their pockets. As a promoter/founder you pay almost 250 percent more as taxes if you were taking out money from the business as salary/dividends compared to say paying capital gains…. tweeted Nithin Kamath, founder and chief executive officer of Zerodha, the tech-driven stock-broking company. The salaried class was earlier chafing at the discriminatory tax treatment of salary and dividend. Now they are at par. If anything salary comes out a little less unscathed given the sprinkling of concession to allowances, perks and retirement benefits which is perhaps why Zerodha wants to reward its three working directors with a possible Rs 100 crore salary each while being chary of a cash dividend. Be that as it may.
Our income tax law strangely has been discriminating in favor of buyback of shares by expressly saying that it did not amount to payment of dividend ever since the permissive regime of buyback was ushered in, in 1999. In 2013, the UPA government corrected this slant but only partially by bringing a DDT-like regime enshrined in section 115QA targeting closely-held companies alone.
Finance Minister Nirmala Sitharaman in 2019 extended the scope of section 115QA to all companies including the listed. Accordingly, a company, whether closely or widely held, buying back shares has to pay a 20 percent plus tax on the amount it forks out less the amount received from the shareholders at the time of subscription. And the shareholders themselves would be left severely alone. This flies in the face of taxing the ultimate beneficiary principle.
Why should a company pay tax on buyback when benefits therefrom are enjoyed by the shareholders? To wit, if the market price is Rs 300 per share but the buyback price is Rs 450 under the tender method, the extra Rs 150 gotten by the shareholders ought to be taxed as dividend in their hands. The remaining amount Rs 300 minus cost or indexed cost of shares must be taxed as capital gains. If buyback is consummated through market purchases, this neat two-way split between dividend and capital gains will not be possible resulting inevitably in shareholders paying tax on account of capital gains alone as was the case earlier before the warped section 115QA regime kicked in.
Why should the company pay 20 percent plus tax on Rs 450 minus face value of Rs 10 i.e. on Rs 440—assuming two decades ago it made an IPO at par—which fosters the erroneous impression that it had traded in shares when all that it did was to raise capital earlier and redeem it now? It is the shareholder who has invested or traded in shares. And it is he who should be taxed.
Should the buyback be consummated through the market purchase mode, the inequity of tax being paid out of the common pool would be even more glaring and accentuated, given the fact that unlike in the tender method when proportionate offers are made to all the shareholders, in the open market a large number of shareholders are bound to be left out. Why should a company’s funds be made liable when select shareholders alone have benefitted who in any case, parenthetically, are going to pay a soft tax of 10 percent having sold through a recognised stock exchange in India?
If the Finance Minister wants to hasten tax collection on this account, let her mandate a 20 percent TDS on the buyback amount but just for the sake of ease and speed of collection, she should not give short shrift to equitable considerations which foisting the tax on company amounts to. Simplistic solutions should not be passed off as simple solutions.
As it is, some of the profitable closely held companies in India are resorting to or mulling annual buyback with gay abandon as if it is their bread and butter operation. Its promoters are encouraged by the fact that the tax burden after all falls on the company at a rate much softer than the maximum marginal rate applicable to individuals. So until and unless the undeserved, and perhaps unintended, slant in favor of buyback vis-à-vis dividend is removed, buyback could be cynically viewed as an instrument of tax planning by promoters particularly of closely held companies earning phenomenal profits.
Source : www.cnbctv18.com
------------------------------- The end -------------------------
No comments:
Post a Comment