As buyback gets taxing, IT companies may switch to dividends

BENGALURU: Cash-rich Indian IT services companies may now offer more dividends to return cash to shareholders, against the recent norm of share buybacks that have become less attractive with the budget proposing to introduce a new tax.

“Buyback is the most efficient way to return capital in India because it was not taxed earlier. It also helps companies improve the value when they think the market is not fairly pricing the stock,” said V Balakrishnan, a former finance chief of InfosysNSE 0.00 %. “Suddenly you tax buyback, companies will shift to dividend because buyback comes with its own hassles.”

Share buybacks by listed companies aren’t taxed currently, but there is a 15% tax on dividend payment. To discourage companies from using this loophole, the budget has proposed a 20% tax on the money spent on share buybacks. Technology services companies have been rewarding shareholders by buying back shares and issuing dividends.