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Direct tax proposals sensible, but need tweaking
March, 05th 2013

Buyback of shares has as many adherents as detractors. Share capital, once considered sacrosanct and beyond tinkering by company managements so as to protect creditors’ interests, can now be played around with, without the leave of the court. The US and the UK led the way. Predictably, we followed suit.

The rationale trotted out for straying away from what once was considered a holy writ was the self-serving alibi that a company should be allowed to return the excessive capital to shareholders, lest it acts as a drag on returns on their investments.

Our policymakers also parroted the same alibi, little realising that it would come as manna from heaven for those lapping it up with ulterior motives.

Yes, in India buyback of shares has been resorted to by promoters, shaking in their boots with a feeble hold on listed companies, to bolster their control. They do this by using company’s funds nonchalantly to up their stake without spending a rupee.

Thus, a promoter with 20 per cent stake ups it to 25 per cent by asking the company to buyback 20 per cent of the share capital. He now owns 20 out of 80, thus giving him a better grip on the company — a 25 per cent stake.

There is nothing altruistic about this exercise. On the contrary, it is all about self-aggrandisement at the expense of public shareholders, some of whom, to be sure, benefit from the higher price paid in the scramble for more shares in the market.


The more democratic alternative of pro rata buying from all the shareholders has seldom been adopted. And in the case of unlisted companies, buyback has come to be resorted to as an alternative to paying dividend and dividend distribution tax (DDT).

The Finance Minister must be commended for penalising the misuse of buyback by non-listed companies by slapping DDT of 20 per cent on the company. This hits where it hurts. Now, unlisted companies buying back shares will pay 20 per cent DDT and their shareholders, capital gains tax.

There was no reason why the same treatment should not have been given to listed companies. Listed companies too can use buyback as an alternative to dividend to sidestep DDT, by resorting to the more democratic alternative of buying pro rata from shareholders, and not from the market.


The move to mandate deduction of an ad hoc tax of 1 per cent where the sale price exceeds Rs 50 lakh is basically sound, except that it will inconvenience the buyer. He will have to hotfoot to the bank accepting tax and deal with the cumbersome procedure of filling up forms. A person not well-versed with tax matters might grumble and fumble, moan and groan.

Why not use the services of the registrar of properties? In other words, instead of bothering the buyer with this onerous task, it would be so much better if the registrar was mandated to collect 1 per cent of the consideration in addition to his own stamp duty and deposit the same with the income-tax department.

The registrar is already roped in as an ally by the department for fixing stamp duty value of properties as well as to report high value transactions, that is, registration of properties for more than Rs 30 lakh so that the department can gun for both the buyer and seller in case they are remiss in paying their taxes.

It reposes faith on his valuations, and calls upon sellers of properties to pay tax on the basis of such valuation where they claim that they have got a lesser price.

In fact, this would be a fool-proof way of collecting tax because the buyer might be remiss in his duties, whereas the registrar can simply refuse to register the transfer unless both the stamp duty and the TDS have been deposited with him. Besides, the registrar is better equipped to deal with another Government department. He might make a lumpsum transfer of funds to his cousin income-tax department say, once a month, thus obviating the need for making numerous payments which would be the case if the buyers were to deal with it individually.


The Finance Minister perhaps wanted to link the exemption limit to inflation. He committed a Freudian slip and disclosed what was in his subconscious, when he said that with the inflation rate being 10 per cent, there was a case for upping the tax free limit to Rs 2,20,000 from Rs 2,00,000, but his finances did not permit this luxury; hence, he was confining this hike in the tax-free limit indirectly by way of a tax credit up to Rs 2,000 only to those who earned not more than Rs 5 lakh.

One wishes that at least when the country’s finances are in better shape the tax exemption limit is automatically hiked by the extent of inflation, as is done in the UK. This would also sit well with the Government’s move to usher in inflation-indexed bonds to compensate investors for loss of purchasing power through the ravages of inflation.

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