Corporations Rush to Repurchase Shares Before Tax Changes
Corporations are accelerating their share repurchase efforts in anticipation of new tax regulations that will take effect on October 1st. The recent budget proposal outlines that under the new rules, shareholders will be taxed on buyback proceeds based on their individual tax brackets. Currently, these transactions are taxed at a flat rate of approximately 23% at the corporate level.
This impending change has spurred a surge in buyback announcements. In the three weeks following the budget announcement on July 23rd, 15 companies declared share buybacks. This is a significant increase compared to the 18 companies that announced buybacks between January 1st and July 23rd.
Market analysts predict that this trend will continue in the coming month, but expect a sharp decline in buyback announcements after October 1st. Gaurav Dua, head of Capital Market Strategy at Sharekhan by BNP Paribas, noted that from October onwards, buybacks will no longer provide a tax advantage.
Under the revised Budget provisions, taxes on share buybacks will be levied on the shareholders receiving the proceeds, according to their respective tax slabs. The tax will apply to the entire buyback amount, with the acquisition cost of the shares recorded as a capital loss, which can be used to offset future gains from other share sales.
Several companies have already announced buybacks since July 23rd, including Indus Towers, AIA Engineering, Welspun Living, TTK Prestige, Cera Sanitaryware, VLS Finance, Navneet Education, and Dhanuka Agritech. Additionally, Technocraft Industries’ board is scheduled to meet on Tuesday to discuss a share buyback proposal.
It's important to note that while listed companies are mandated to maintain a clear dividend policy, there is no such requirement for share buybacks. This lack of regulation could potentially lead to increased volatility in the market.