TAX ON BUYBACK OF SHARES

TAX ON BUYBACK OF SHARES

WHAT IS BUYBACK OF SHARES?

Buyback of Shares is also known as Share Repurchase. The name itself suggests that buyback refers to the buying back of shares by the company from the shareholders in the open market at a premium. The repurchased shares are cancelled by the company and hence, reduce the outstanding shares in the market. Tax on Buyback of shares is now regulated by Section 115QA of the Income Tax Act,1961.

WHY DO COMPANIES BUYBACK SHARES?

  • Correction of Share Price: Buyback of Shares generally results in increase in the market price. So, if the market price of the shares is highly undervalued, the company can correct it by buying back of shares.
  • Promoter’s Shareholding: One of the main reasons behind buyback of shares is to increase the shareholding of the promoters by purchasing from the open market.
  • Attractive Financials: With the reduced number of shares from buyback, Earnings per share of the company would increase. It also helps in improving the key financial ratios.
  • Utilization of Excess Cash: By buyback of shares, company can use their excess cash balance by paying premium to the shareholders over and above the market price.

INCOME TAX ON BUYBACK ON SHARES AS PER SECTION 115QA

Initially, Section 115QA was applicable only to Unlisted companies but in the Union Budget 2019, it was announced that this section is now applicable to Listed companies also. The effect of this was applicable from 1st July, 2019.

As per Section115QA, all the companies (both listed and unlisted) have to pay tax at the rate of 20% (plus Surcharge @ 12% and HEC @4%).

  • Companies have to pay tax on the amount of distributed income on the buyback of shares.
  • The tax shall be paid within 14 days from the date of payment to the shareholders.
  • The amount of tax paid is not available for any credit.
  • Every company shall pay tax on the distributed income in case of buyback of shares even if that company is not liable to pay income tax.

As per Section 115QA read along with Section 10(34A), shareholders are exempt from any kind of tax on buyback of shares. It would have been considered as double taxation if both shareholders and companies have to pay tax on buyback of shares. Therefore, only companies are liable to pay tax on buyback of shares.

TAX LIABILITYBEFORE AMENDMENTPOST AMENDMENT (2019)
COMPANY (Both Listed and Unlisted)  No Tax Liability  The company is now liable for a buyback tax of 20% on the Distributed Income*
INDIVIDUAL SHAREHOLDERIndividual shareholders must pay Capital Gains Tax (Long term or Short term) depending on the holding period of shares  No Tax Liability
*Rule 40BB of Income Tax Act 1962 contains the procedure for the calculation of Distributed Income in different cases.

 

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