In simple terms, buy-back of shares means the situation when the company repurchases its own shares. A company may opt to buy-back the shares under any other the following situations –

– When the quoted price on the stock exchange for the company’s share does not represent the true value of the shares; or

– When the company doesn’t have paths to invest its accumulated funds, and it goes for buy-back of shares with a view to return the capital; or

– When the promoters are planning to increase their shareholding in the company.

The reason behind introducing the buy-back provisions under the income tax –

Generally speaking, a company which has distributable surplus has the following two options –

1. Declare dividend; or

2. Purchase its own shares (i.e. buy-back its shares).

The declared dividend is chargeable to ‘Dividend Distribution Tax’, whereas, earlier, the amount distributed as buy-back of shares was chargeable to ‘Capital Gains’. Being treated as ‘Capital Gains’, the income tax was paid at lower rates on buy-back of shares.

In order to avoid the tax, the unlisted companies started resorting to buy-back of shares instead of declaring dividends. As an anti-tax avoidance measure, the Government introduced section 115QA under the Income Tax Act vide the Finance Act, 2013.

Provisions of section 115QA were initially applicable only to unlisted companies. However, vide the Finance (No. 2) Act, 2019, the provisions of section 115QA are amended and the same is made applicable to the listed companies also. The amended to section 115QA basically aims to bring the tax on dividend and the tax on buy-back of shares at par.

Understanding the provision of section 115QA and its amendments thereon –

The salient features of provisions of section 115QA (along with the recent amendments) are narrated here under –

  • The company (both listed and unlisted company) is liable to pay additional income tax on an amount of distributed income on buy-back of shares from a shareholders.
  • The company is liable to pay tax @ 20% plus surcharge @12% plus applicable cess.
  • Exceptions –

The provision of section 115QA doesn’t apply when all the below mentioned conditions are satisfied –

The company and the principal officer of the domestic company is liable to pay tax under section 115QA. The tax is payable within a period of 14 days from the date of payment of any amount to the shareholders on the buy-back of shares.

  • The tax on distributed income (i.e. buy-back) is payable by the company even if such company is not liable/ required to pay income tax.
  • The tax on distributed income paid/ payable by the company shall be treated as final payment of tax. No further credit shall be claimed either by the company or any other person in respect of the amount of tax so paid.
  • Income charged under section 115QA shall not be allowed any deduction under any other provisions of the Act either to the company or shareholders.
  • Example for proper understanding –

Suppose M/s. XYZ originally issued shares for INR 10. The shareholder bought the shares at INR 400. The company M/s. XYZ buy-back the shares at INR 600.

In such case, as per provisions of section 115QA of the Income Tax Act, the tax is payable on INR 590 (INR 600 – INR 10).

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