Considering the recent amendments in Income Tax Act, distribution to shareholder / promoter has become challenging, specifically post introduction of section 2(22)(e). The most viable options to distribute / pull out funds for promoter are incentive pay-out, dividend distribution and buy-back. It is worthwhile to note that dividend income is now taxable in hands of the shareholder and no longer exempt. Thus, off the 3 options listed above, buy-back is preferred option for an investor / shareholder / promoter to pull out the funds from direct tax angle. Though, entity needs to ensure adherence to other regulations specially the requirements / limits prescribed under the Companies Act, 2013 & relevant rules.
Please see below tabulated tax impact under 3 alternatives i.e. dividend distribution (section 115O & 115BBDA), buy-back [115QA & 10(34)] and incentive pay-out (section 17):
|Taxation in the hands of||115O & 115BBDA||115QA & 10 (34)||17|
||Exempt u/s 10 (34)||
||Taxable → @ 23.296%||Nil|
Considering the above, most of the Companies will prefer to switch to buy-back option instead of distributing incentive or dividend to its shareholder / investor from a taxation perspective, but this may not always be feasible. The entity must be mindful of the fact that buy-back comes with inherent limitations. To say, the maximum amount that can be pulled out is 25% of the Company’s existing paid up capital & free reserves at a time, which is not the case in dividend & incentive pay-out. Also, debt : equity ratio cannot be more than twice the capital & free reserves. Needless to mention the compliance / adherence to regulations under Companies Act are cumbersome.
1. Section 115BBDA – https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx
2. Section 10(34) – https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx
3. Section 115QA – https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx
4. Section 17 – https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx