Buyback of shares is when a company repurchases the shares issued by it from the existing shareholders. The company buys back its shares usually at market value or higher. Companies use buy back as a means to return cash to shareholders and regain ownership. Tax on buyback of shares in India is now regulated by Section 115QA of the Income Tax Act, 1961.

> TAXATION IMPACT:

  • As per section 115QA, Both listed and unlisted companies are liable to pay additional income tax on the amount of distributed income on buyback of
    shares from shareholders.
  • The company is liable to pay tax at 20% plus surcharge at 12% plus applicable cess.
  • As companies are now liable to pay tax on buyback of shares. Furthermore, shareholders do not have to pay any tax on any income arising from
    the buyback.

> BUYBACK VS DIVIDEND:

Pursuant to amendment vide Budget 2020, domestic companies are no longer required to pay DDT and dividend income is instead taxable in the hands of shareholders at the applicable tax rates.

  • Maximum permissible buy back is 25% of paid up capital and free reserves −

provided total shares to be bought back do not exceed 25% of paid up equity capital;

and − debt equity ratio < 2:1.

  • Dividends can be declared out of the profits of the company for that year, after providing for depreciation; or Out of the profits of the company for any previous financial year arrived at after providing for depreciation.

>BUYBACK SCENARIO:

Cash available for distribution 100

Less : Buyback Tax (20%+ cess) i.e 23.3% (18.9)

A. Cash Received by shareholders 81.1

> DIVIDEND SCENARIO:

Cash available for distribution 100

less : Tax in the hands of resident shareholder @ 35.88%* (35.9)

B. Cash Received by shareholders 64.1

> TAX SAVING IN CASE OF BUYBACK:

C. INDICATIVE TAX IMPACT (A-B) 17.0

*For the purpose of dividend tax, we have assumed the highest tax slab and surcharge applicable to resident individual shareholder

Author Bio

Qualification: CA in Practice
Company: Oswal & Heda Chartered Accountants
Location: Pune, Maharashtra, India
Member Since: 27 Mar 2021 | Total Posts: 2
Anubhav has over 2 years of post-qualification professional experience in handling Audit & Assurance of various entities, Direct & Indirect Tax Advisory services, Project financing, Litigation Services, RERA, Preparation and Finalization of Income Tax returns, Monthly Compliance which includ View Full Profile

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