Tax on Income distributed to shareholder (Buy Back Tax)
As we are aware of the amendment brought by Finance Bill No. 02, 2019 that now Tax is to be levied on Buy Back of shares of Listed Company too.
Before start, please be clear that any payment made by a company on purchase of its own shares from a shareholder shall not to be treated as dividend as it is specifically excluded under section 2(22)(iv) of the Income Tax Act. Consequently, section 115-O – “Dividend Distribution Tax shall not be attracted.
Now, let us discuss, scenario before the amendment and after the amendment: – We will here discuss the provision under Two Broad Categories. (i) Buy Back of Unlisted shares (ii) Buy Back of Listed Shares
For Unlisted Shares: – Section 115QA of the Act provides for the levy of additional Income-tax at the rate of twenty percent of the distributed income on account of buy-back of unlisted shares by the company. As additional income-tax has been levied at the level of the company, the consequential income arising in the hands of shareholders has been exempted from tax under section 10(34A) of the Income Tax Act. It is here to be noted that there is not any amendment brought by Finance Bill 2019 for buyback of shares of Unlisted company.
For Listed Shares:- Section 46A of the Income Tax Act being charging section was applicable in this case and consequently, the Normal Capital Gains (Amount received in Buy Back – Cost of Acquisition) had to be computed (Subject to first or second proviso to section 48). Period of holding shall be from the date of acquisition to the date of Buy-Back. This was the simple process to calculate capital gain on buyback of shares of Listed Company which has to do by shareholder end. Company buy backing the shares was not need to pay any Additional income Tax in the case of Listed Company.
Why Amendment came: – (It is very important to understand the logic behind shifting the burden of tax on the company from shareholder).
Section 115QA was introduced as an anti-abuse provision to check the practice of unlisted companies resorting to buy-back of shares instead of payment of dividends. This practice of widespread abuse was noted, in the past, amongst unlisted companies where the taxpayers preferred it for tax avoidance, as the tax rate for capitals gains was lower than the rate of Dividend Distribution Tax (DDT). However, instances of similar tax arbitrage have now come to notice in case of listed shares as well, whereby the listed companies are also indulging in such practice of resorting to buy-back of shares, instead of payment of dividends.
In order to curb such tax avoidance practice adopted by the listed companies, the existing anti-abuse provision under Section 115QA of the Act, pertaining to buy-back of shares from shareholders by companies not listed on a recognized stock exchange, is proposed to be extended to all companies including companies listed on the recognized stock exchange. Thus, any buyback of shares from a shareholder by a company listed on the recognized stock exchange, on or after 5th July 2019, shall also be covered by the provision of section 115QA of the Act. Accordingly, it is also proposed to extend exemption under section 10(34A) of the Income Tax Act to shareholders of the listed company on account of buy-back of shares on which additional income -tax has been paid by the company. These amendments will take effect from 5th July 2019.
In simple word, now section 115QA shall be applicable in all the case i.e., Buy Back of both Listed and Unlisted company shares and now every Company buy backing the shares has to pay tax on distributed income at the rate of 20% on such distributed income. Consequently, since the company is already paying the Tax, Amount received by the shareholders shall be exempt under section 10(34A) of the Income Tax Act in the hand of the shareholder.