Section 115QA – Effect on foreign investments


As per section 115QA of Income tax Act 1961, (Chapter XII-DA), in the case of distribution of income by the unlisted company on Buy back of shares the law casts an obligation on the company to pay additional income tax @20% on the distributed income in addition to the corporate tax. In the case of foreign investor, the tax of 20% becomes payable even though the amount received by him in foreign currency works out to less than the amount which was brought in at the time of initial investment. To elaborate, the following illustration has been given:

1. Amount invested by foreign investor in unlisted company = USD 1 million

2. Amount for which shares were issued (Exchange rate USD 1 = INR 40) = INR 4 Crores

3. No. of shares issued @10 per share = 40,00,000

4. No. of Shares bought back by the company (25% of share issued) 10,00,000

5. Amount paid to foreign investor (buy back price INR 12.50 per share) = INR 1,25,00,000

6. Amount received by foreign investor {USD 1 = INR 60} = USD 208,333

7. Loss to foreign investor (i.e. 250,000- 208,333) = USD 41,667

8. Additional tax payable by the company(125,00,000 – 100,00,000)*20% = INR 500,000

Tax to be paid by the company on Rs. 25,00,000 is the final tax in addition to corporate tax and the amount of tax so paid is nothing but tax paid by the foreign investor. The foreign investor is thus required to pay tax even when he makes losses. Private equity investor who had invested in India are facing double concern – firstly in the form of sharp depreciation in Indian Rupee and secondly in the form of tax amendment in the form of section 115QA.

In this connection, it would be worthwhile to say that distributable income for foreign investor shall be worked out by making the foreign currency adjustment as per the provisions which exists in section 48 of Income-tax Act, 1961 used for computing capital gains, and tax should be levied only on the excess of amount received by investors over the amount brought in at the time of investment.


In view of the concerns faced by foreign investors after introduction of section 115QA, suitable amendments may be carried out in the Income-tax Act, 1961 so that foreign investors do not have to pay tax when their holding results in losses only due to foreign exchange fluctuation.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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June 2021