By Siddarth M Pai

India’s fiscal history on share buybacks is a tug-of-war between capital formation and aggressive tax enforcement. Buybacks are a process by which a company repurchases it securities from shareholders and extinguishes them. Legally, a buyback checks every box for Capital Gains:(a) An Asset: The share (b) A Transfer: The extinguishment (c) A Gain: The profit. Yet buybacks have seen significant litigation and tinkering due to the department treating them as dividends. Prior to Finance Act, 1999, the department treated such buyback gains as dividend as they viewed it as a distribution of accumulated profits, disregarding the fact that shares were extinguished pursuant to a buyback. To avoid litigation, Section 46A was inserted to treat buyback income as capital gains.

However, abuse detected by Mauritius entities and structuring to avoid DDT saw the introduction of measures in 2013 to tax buybacks by unlisted companies at 20% rate........

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