ACCOUNTING & TAXATION
Income-tax on buyback of shares by unlisted companies:
As we all aware that in simple terms, buy-back of shares means the situation when the company repurchases its own shares. Buy back of shares is one way to distribute companies’ surplus profit, the another way to disburse its surplus profit is to declare dividend.
Earlier, the declared dividend is chargeable to ‘Dividend Distribution Tax’, whereas, the amount distributed as buy-back of shares was chargeable to ‘Capital Gains’. Being treated as ‘Capital Gains’, the income tax was paid at lower rates on buy-back of shares. In order to avoid the tax, the unlisted companies started resorting to buy-back of shares instead of declaring dividends. As an anti-tax avoidance measure, the Government introduced section 115QA under the Income Tax Act vide the Finance Act, 2013.
Provisions of section 115QA were initially applicable only to unlisted companies. However, vide the Finance (No. 2) Act, 2019, the provisions of section 115QA are amended and the same is made applicable to the listed companies also. The amended to section 115QA basically aims to bring the tax on dividend and the tax on buy-back of shares at par.
Extract of Amended Section 115QA is as under:
“Tax on distributed income to shareholders.
115QA. (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares [***] from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.
Provided that the provisions of this sub-section shall not apply to such buy-back of shares (being the shares listed on a recognised stock exchange), in respect of which public announcement has been made on or before the 5th day of July, 2019 in accordance with the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).]
Explanation.—For the purposes of this section,—
(i) “buy-back” means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies;
(ii) “distributed income” means the consideration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed.
(2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in sub-section (1).
(4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon.”
Tax treatment of Buy back of shares as per Section 115QA:
The company (both listed and unlisted) is liable to pay tax @ 20% plus surcharge @12% plus applicable cess.
What are the conditions in which Section 115QA is not applicable?
The provision of section 115QA doesn’t apply when all the below mentioned conditions are satisfied:
- The company is listed on the recognized stock exchange; and
- The company has buy-back its shares; and
- The public announcement has been made before 5th July 2019; and
- The public announcement is done in accordance with the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018.
What is the due date of payment of tax in case of buy back of shares?
The tax is payable within a period of 14 days from the date of payment of any amount to the shareholders on the buy-back of shares.