Budget 2024: Amendment in Tax provisions of Buy Back of Shares by Company

The Finance Bill, 2024 introduced by the Hon’ble Finance Minister in Parliament on 23rd July, 2024 has proposed total revamping of provisions with respect to taxability of buyback of shares by a company.

In accordance with the provisions contained in Section 115QA of the Income Tax Act, 1961 the scheme of taxation of transactions with respect to buyback of shares by a company resulted in the following implications:

1. The company was liable to pay tax at the rate of 23.296% on the difference amount between the issue price of the said shares and their buyback price.

2. The consideration for buyback of shares received by the shareholders was exempt from tax in accordance with Section 10(34A) of the Act.

3. The said buyback of shares resulting in utilisation of excess liquidity of company by reducing its share capital and transfer of funds to its shareholders at a tax rate of 23.296% which was paid by the company.

4. The said provisions resulted in huge benefit for the shareholders as the said consideration received from the company was totally exempt from tax, not resulting in any outflow in the hands of the shareholders.

The Finance Bill, 2024 has proposed certain changes which would result in the process of buyback of shares to be consigned to history. It has been proposed as under:

1. The entire sum received by the shareholder on buyback of shares will be treated as dividend in accordance with Section 2(22)(f) of the act. As a result, the entire amount would become taxable in the hands of the shareholders at normal slab rates.

2. The amount paid by the shareholder who acquired the said shares would not be allowed as a deduction from the consideration received and the entire sum received from the company on buyback of shares will be deemed to be dividend.

3. The cost of acquisition of such shares will be treated as capital loss and the same will be allowed to be set off against any other capital gain or will be allowed to be carried forward in accordance with the law.

In other words, distribution of dividend by a company would be more tax effective now instead of carrying out buyback of shares.

The new provisions with respect to taxability of shares will become applicable with effect from 1st October, 2024. As a result, the buyback of shares which are under process and can be completed before 30.09.2024 will be taxable in accordance with the old provisions.