The Finance Ministry has said that it will look into the applicability of 20% tax proposed in the 2019-20 Budget on the current share buybacks by listed companies.
This tax was proposed in the budget to discourage the practice of avoiding Dividend Distribution Tax(DDT) through buybacks by listed companies.
Dividend Distribution Tax(DDT) is paid by companies who distribute their profits to their shareholders in the form of dividends.
Buyback of shares refers to the corporate action where a company repurchases its own shares from the existing shareholders.
During the buyback of shares,the price of shares is usually higher than the market price.Typically,companies that have excess cash with no specific investment or other deployment requirements consider buybacks.
Further,buying back shares is also a route to make a business look more attractive to investors.By reducing the number of outstanding shares,a company’s earnings per share ratio is automatically increased.