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Tax on buyback likely to affect valuation of Indian IT firms

NEW DELHI: A new tax on buyback of shares by public companie..

NEW DELHI: A new tax on buyback of shares by public companies is likely to make enterprises ditch the buyback route. A 20 per cent tax will be levied on the amount of buyback consideration less issue price, taking the sheen off buybacks. In recent years, IT firms have frequently taken the buyback route, which presents it a more flexible way of returning money to shareholders, compared to dividends.

The move, leading to an effective hit of almost 23 per cent on payouts (with surcharge and cess), is intended to discourage companies from misusing buybacks to avoid Dividend Distribution Tax (DDT) and came into effect on July 5. Currently, companies declaring dividend are liable to pay 21 per cent (including surcharge) as DDT, thereby removing any incentive for public companies to go through the relatively tedious share buyback process.

While the move will reduce payouts for investors across sectors, it is particularly a negative for valuations of the IT sector. Smart capital allocations through buybacks have benefited valuation of IT companies largely and the amendment is a disincentive, said Kawaljeet Saluja of Kotak Institutional Equities, said. “This tax is effectively another form of income tax,” he added. Data from Edelweiss Research shows in FY19, IT major Tata Consultancy Services (TCS) returned about 110 per cent of free cash flow to its shareholders valuing up to Rs 13,000 crore in dividends and Rs 16,000 crore in buybacks. Extrapolating this results in tax expenses worth RRead More – Source

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