Buyback tax: Major relief for Infosys, Wipro; but IT sector may not have much to gain

Infosys and Wipro can breathe a sigh of relief. Both companies will be exempted from the buyback tax of 20 percent, which was announced during Budget 2019.

Infosys announced a buyback of Rs 8,260 crore in January. The buyback started in March and closed on August 27. Wipro made public announcement for buyback of Rs 10,500 crore on June 5. Wipro’s buyback offer started on August 14 and closed on August 28.

As per Budget 2019, both companies were liable to pay additional 20 percent buyback tax. However, with the recent announcement, they are relieved from paying this tax.

In a press briefing on September 20, Finance Minister Nirmala Sitharaman announced that, “In order to provide relief to listed companies which have already made a public announcement of buyback on or before July 5, 2019, it is provided that tax on buyback of shares in case of such companies shall not be charged.”

But, if there is any such announcement after July 5, the companies will be liable to pay. Gautam Duggad, Head of Research – Motilal Oswal Financial Services, said, “It is only one-time offer kind. Companies will have to pay buyback tax if they are going the buyback route now.”

Another analyst pointed out that more companies will probably take the dividend route though it is a relief for firms that had announced buyback before July 5.

IT majors have been using the buyback route for returning excess cash to shareholders given its tax advantages. According to a Jefferies Equity Research report, over the last three years, top five IT firms have returned $12 billion.

In 2018, TCS announced buyback worth Rs 16,000 crore and HCL Tech kicked off its Rs 4,000-crore buyback in September 2018. “Going forward, IT services companies will need to decide whether they still want to opt for buy-back route given limited tax advantages,” the report added.

Will the reduction in corporate tax benefit IT sector?

According to analysts, IT sector does not have much to gain from corporate tax reduction.

As per the recent announcement, corporate tax has been brought down to 22 percent from 30 percent for all corporate and 15 percent for manufacturing firms.

According to Duggad, while it is one of the biggest reforms, IT sector does not have much to gain from this as they are dependent on external factors rather than internal.

The IT sector business is dependent on volatility in the external markets such as the US, UK and Europe than the domestic. Close to 85-90 percent of the business comes from these markets, and the India market accounts only for about 10-15 percent.

Source : http://tiny.cc/05r2cz

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