Under the new tax regime for share buybacks, significant changes have been proposed, shifting the tax burden from companies to investors. Previously, the capital gains from buybacks were calculated under section 46A of the Income Tax Act, 1961, and were exempt for shareholders under section 10(34A). Companies were responsible for a 20% tax on the buyback amount under section 115QA. However, starting October 1, 2024, these provisions will be replaced. Investors will now bear the tax liability, with buyback payments considered deemed dividends under section 2(22)(f) and taxed as income from other sources. The cost of acquisition can be carried forward as a capital loss, offsetting future gains, but with an eight-year cap. Additionally, companies must deduct a 10% TDS on the buyback amount. These amendments, while allowing capital loss recognition, place a heavier tax burden on individual investors, impacting their net gains and financial planning. This shift could potentially discourage small investors from participating in buybacks, as the immediate tax hit could outweigh long-term benefits.
- When the Blessing Ceases to Curse
Buy Back of shares is a practice of purchasing its own shares from the investors by the company. The main purpose of buy back is to consolidate the ownership, share price adjustments, increase promoters stake etc. From the point of view of the investor, since the investor tends to get a better price if compared to the market added with perk of no tax liability, the investors prefer selling the shares back to the company fetching them more and more tax free income.
BACKGROUND:
The capital gain on buyback of shares used to be calculated u/s 46A of the Income Tax Act, 1961 in the hands of the shareholders while the same was taxable as per the provision of section 115QA in the hands of the company.
In nutshell, what used to happen till 30.09.2024
Due to section 46A of the Income Tax Act, 1961:
- The Capital Gain was calculated as the difference between the value of consideration and cost of acquisition in the hands of shareholders.
- The said capital gain was exempted u/s 10(34A) of the Income Tax Act,1961 in the hands of shareholders.
Due to section 115QA of the Income Tax Act, 1961:
- Both listed and unlisted companies were obligated to pay additional income tax on the distributed income from share buybacks. This tax liability applied to the company regardless of whether it was otherwise liable to pay income tax or not.
- The tax rate for the distributed income (i.e., the buyback amount) was set at 20%, along with a 12% surcharge and applicable cess.
- This tax payment on buybacks was considered a final settlement, with no further tax credits available to the company or any other party.
- Since companies were responsible for this tax, shareholders were relieved of any tax obligation on income arising from share buybacks as provided under section 10(34A).
BUDGET 2024 PROPOSALS:
While dividends were taxed at the shareholder’s end at their slab rate, buybacks were taxed at the company’s end @20 %, and investors participating in the buybacks did not have to pay capital gains tax. However, recently on 23.07.2024, in the Finance Bill 2024 a bomb was thrown on the bubble of tax free happiness of the investors. Several amendments were proposed to be made in the Income Tax Act,1961.
Section 115QA that is the section governing the tax on buy back was proposed to be taken down and not to be applied from 01.10.2024.
So, who is supposed to pay the tax on the capital gain and at what rate? Definitely not the companies anymore but the INVESTORS, the investors who thrive hard to add on each penny into their savings. Again the corporates who anyways earn humungous would not be made to pay but the middle class and their aspirations would suffer the taxes and HOW?????
Here to welcome the proposal for another section, Sec 2(22)(f), which brings into the purview of deemed dividend
“any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013”.
It is not an unknown fact that the deemed income is to be reported under the head “income from other sources”. So will be reported the buy back for the shareholders, but section 57 too has been proposed to be amended to be read as under
“57. The income chargeable under the head “Income from other sources” shall be computed after making the following deductions, namely :
(i) in the case of dividends other than that referred in sub-clause (f) of clause (22) of section 2 or interest on securities, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee ;”
Thus, the amount received on the buyback of shares is proposed to be taxed directly without giving any benefit of the cost of acquisition of those shares.
But!! How that legally be possible, so a sugar coated bitter gourd has been proposed to be served in the plate of investors in the form of revised section 46A of the Income Tax Act, which would allow the recognition of capital loss by the investors which resultantly could then be carried forwarded and setoff in succeeding years against the future capital gains. The following explanation has been proposed to be added with effect from 1st day of October, 2024, namely:
“Provided that where the shareholder receives any consideration of the nature referred to in sub-clause (f) of clause (22) of section 2 from any company, in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024, then for the purpose of this section, the value of consideration received by the shareholder shall be deemed to be nil”.
This would imply that the Capital Gain for the shareholder would now be the capital loss that is
Capital Gain to Shareholders= Value of Consideration – Cost of Acquisition
Capital Gain = 0 (-) Cost Of Acquisition
Capital Gain = (-) Cost of Acquisition
Thus, the cost of acquisition would be allowed to be carried forward as capital loss to be setoff against the gains in succeeding years. Now the question is what if the assessee does not earn capital gains in succeeding years or chooses to not to invest in future, the money belonging to assessee, would stand still as capital loss to be adjusted against any future gains but not as income in his hands.
Further, that the quantum of cost of acquisition cannot be compared with the capital gains, the setoff may take years with a capping of 8 years. This in authors view would be exploiting and harassing the investor’s right to his own money and depriving him of his hard earned money.
TAX DECUCTION AT SOURCE:
It wasn’t enough for the government that tax free dividends were made taxable for the investors after the abolishment of DDT through Budget 2021 after which the companies were required to deduct TDS at the rate of 10% on the dividend distributed. Now that the custom must continue, it has been proposed to add “or sub-clause (f)” after the word, brackets and letter “sub- clause (e)” in section 194 making the section read as
“The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment by any mode in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) or sub-clause (f) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rate of ten per cent.”
CONCLUSION:
As per the proposed amendments, the investor would now be held taxable for the full value of consideration of buyback without any deduction of expenses, infact the cost of acquisition to the investor will be allowed to be set off and carry forwarded as capital loss. The TDS will be deducted on the consideration so paid to the investor by the company.
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