Change in Tax implication on Buy Back of share by the domestic company under Finance Act (No. 2), 2024 w.e.f. 01.10.2024.
Summary: The Finance Act (No. 2), 2024, effective from October 1, 2024, introduces significant changes to the tax implications of share buybacks by domestic companies. Previously, under Section 115QA of the Income Tax Act, companies faced an additional tax liability of 20% plus applicable surcharges and education cess, resulting in an effective tax rate of 23.296% on the buyback of their shares. However, with the new amendments, the tax burden has shifted from the company to the shareholders. Now, payments made by a company for the buyback of its own shares will be treated as dividend income, as specified in the newly added clause (f) of Section 2(22). This change means shareholders will now be taxed on these proceeds as income from other sources. The amendment also includes a new proviso to Section 115QA, stating that its provisions will not apply to buybacks occurring on or after October 1, 2024. Consequently, companies will be responsible for deducting tax at source (TDS) at a rate of 10% for resident shareholders and at applicable rates for non-residents. Additionally, shareholders can treat the cost of shares as a capital loss, which may be carried forward for eight subsequent financial years. Overall, these amendments represent a significant shift in tax liability related to share buybacks in India.
Provisions before amendments under Income Tax Act, 1961 :
If any domestic company buy back its own share according to the provisions contained u/s 68 of the Companies Act, 2013 is liable to pay additional tax according to the section 115QA of the Income Tax Act, 1961 at the rate twenty percent plus applicable surcharge and education cess [effective rate @ 23.296% (20%+12%+4%)] before the amendments.
Provisions after amendments under Income Tax Act, 1961 (w.e.f 01.10.2024):
Now w.e.f. 01/10/2024, Finance Act (No. 2) shifted the burden of tax payment from domestic company to the shareholder as the payment received by the shareholder will consider as dividend income and taxable in the hands of shareholder. Accordingly, new clause (f) inserted after clause (e) in section 2(22) in the definition of dividend, which are stated below:
[(f) any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 (18 of 2013);]
Further, Clause (iv) also omitted which defined that the dividend does not include :
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(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
……
Accordingly, section 115QA also amended by inserting new proviso as stated below :
[Provided further that the provisions of this sub-section shall not apply in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024.]
Key notes regarding the changes in tax implications on buybacks of shares under the Finance Act (No. 2), 2024, effective from October 1, 2024:
Pre-Amendment Provisions (Before October 1, 2024)
- Domestic companies faced a tax liability on buybacks at 20% plus applicable surcharge and education cess, totaling an effective rate at 23.296%.
- Buybacks were governed under Section 115QA of the Income Tax Act, 1961.
Post-Amendment Provisions (Effective October 1, 2024)
- Tax Burden Shifted: The tax liability for buybacks is now transferred from the domestic company to the shareholders.
- Amendment in definition of Dividend: A new clause (f) is added to Section 2(22) defining payments by a company for purchasing its own shares as part of “dividend.”
- Amendment to Section 115QA: A new proviso specifies that the section does not apply to any buyback occurring on or after October 1, 2024.
- Shareholders will now be taxed on the proceeds received from the buyback as dividend income. The Consideration payment made by the company to the shareholder will consider as dividend income under the head “Income from other source” result the cost of acquisition of the shares will consider as capital loss which will be allowed to be carried forward for eight subsequent financial years.
- Companies will no longer be responsible for the additional tax on distributed income from buybacks.
- The domestic company buy-back its own shares will be required to deduct tax at source (“TDS”) at the rate of 10% u/s 194 in case of resident shareholders; and in case of non-resident shareholders, at the rates in force or as per DTAA u/s 195.
A comparison of the legal language before and after the amendments made by the Finance Act (No. 2), 2024.
Section 2(22) |
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Before Amendments | After Amendments |
(22) “dividend” includes—
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ; (b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ; (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; but “dividend” does not include— (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ; (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). |
(22) “dividend” includes—
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ; (b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ; (c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ; (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ; (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; [(f) any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 (18 of 2013);] but “dividend” does not include— (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ; (ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalised profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the 1st day of April, 1965 ; (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; (iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off; (iv) [***] (v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). |
Section 115QA |
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Before Amendments | After Amendments |
Tax on distributed income to shareholders.
115QA. (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income: Provided that the provisions of this sub-section shall not apply to such buy-back of shares (being the shares listed on a recognised stock exchange), in respect of which public announcement has been made on or before the 5th day of July, 2019 in accordance with the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992). Explanation.—For the purposes of this section,— (i) “buy-back” means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies; (ii) “distributed income” means the consideration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed96. (2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be payable by such company. (3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in sub-section (1). (4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon. |
Tax on distributed income to shareholders.
115QA. (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income: Provided that the provisions of this sub-section shall not apply to such buy-back of shares (being the shares listed on a recognised stock exchange), in respect of which public announcement has been made on or before the 5th day of July, 2019 in accordance with the provisions of the Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992): [Provided further that the provisions of this sub-section shall not apply in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024.] Explanation.—For the purposes of this section,— (i) “buy-back” means purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies; (ii) “distributed income” means the consideration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed. (2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be payable by such company. (3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in sub-section (1). (4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid. (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon. |
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