Foreign investors bat for tax parity on dividends, buybacks in Budget FY24

FOREIGN PORTFOLIO INVESTORS FPIs) want parity in the tax treatment given to dividends and buybacks in the upcoming Budget.

The FY21 Budget did away with the dividend distribution tax DDT) in the hands of the company and instead mandated that tax be deducted at source TDS) at 10% on dividend income paid by a company to shareholders if the amount exceeded 5,000 a year. This made dividends taxable in the hands of investors.

Indian companies, however, are still subject to a 20% tax plus surcharge and cess) on share buybacks. In 2013,tax on buybacks was introduced for unlisted companies and exempted for shareholders. In 2019, this was extended to listed companies as well. This is because of the practice of tax arbitrage, wherein listed companies resorted to buybacks instead of dividend payment, since the tax rate for capital gains was lower than the rate of DDT.

Most of these buybacks were done through the tender route, which allowed promoters to tender their shares. Analysts said promoters had gained the most through share repurchases, while companies had not benefited much.