Double taxation in case of buy back of shares by the company in case of ESOP’s Section 17


At the time of buy back of shares (not being shares listed on a recognised stock exchange), by a company from the shareholder, the company is liable to pay income tax on distributed income under Section 115QA of the Act.

“Distributed income” has been defined as the consideration paid by the company on buyback of shares as reduced by the amount which was received by the company for issue of such shares. Under ESOP’s, the employee has already paid tax on the perquisite value at the time of exercise of shares (i.e. tax on FMV) as on date of exercise less the issue price or amount actually paid by the employee. Hence there is a double taxation on the difference between the FMV on the date of exercise and the issue price of the shares.

Section 49(2AA) of the Act specifies that where the capital gain arises from the transfer of specified security or sweat equity shares referred to in sub-clause (vi) of clause (2) of section 17, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of the said sub-clause. Similar provision is missing in section 115QA of the Act.

Suggestion by ICAI

It is recommended that for shares issued under ESOP/ equity incentive scheme, the calculation  of distributed income should be regarded as difference between the consideration paid by the company on buy-back of shares and FMV as on the date of exercise for such shares. Accordingly, the tax may be calculated on the difference between the buy-back price and FMV on the date of exercise.

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

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June 2021