Taxing share repurchases

Abstract

The US Inflation Reduction Act of 2022 imposed a 1% excise tax on share repurchases. We can learn from corporate reaction to such a new policy in India. The Indian federal government recently levied a 20 percent tax, plus surcharge, on share repurchases. We show that companies did not slow down their share repurchase initiation. However, to offset the added taxes, they increased their capital investment. The combination of the share repurchase and capital investment decreased their free cash flow. • The Inflation Reduction Act imposed a 1% excise tax on share repurchases. • After enacting a tax on share repurchases, Indian companies did not slow down their initiation. • Companies shifted their activities to avoid an increase in taxes from the repurchase tax. • Indian firm share repurchase and capital investment decreased their free cash flow.