Buyback Tax

The Companies are required to pay the Income Tax on the activity of buyback of own shares, this tax is commonly known as Buyback Tax.

In buyback, the Company purchases back their own shares from the market from their investors at the market value, which is generally higher then the issue price.

Section 115 QA of the Income Tax Act, 1961 prescribes the Buyback Tax.

• Applicable on both listed and unlisted companies (initially applicable only to unlisted companies)

• It is paid on the net amount distributed to the shareholders
• Calculated by this method: Consideration paid by the Company upon buyback of shares (minus) the price at which they have issued those shares in original.

• This is paid at the rate of 20% plus surcharge at 12% plus applicable cess, so the effective rate would be 22.4%.

• Now, no capital gains tax for this.

• 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 buyback tax 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.

• Illustration:
• Suppose, Company A issued (originally) shares at Rs. 10. that particular shareholder bought those shares for Rs. 600;
• Now, when the Company A announces buyback of the shares at Rs. 950.
• As per sec. 115QA, the tax would be calculated on the amount of Rs. 940 (950-10).   

Unintended Double Taxation?

Post Amendment in 2019,  The buyback tax for listed companies may result in indirect double taxation, as the computation mechanism provided considers buyback price less issue price. This does not consider the fact that the shareholder may have purchased the shares at rates higher than the issue price. Also, the previous transfers would have already been taxed. So, this may ultimately lead to double taxation.

For example, if Mr A purchased shares of ABC on stock exchange at Rs 500 from Mr B. Mr B had originally subscribed to the shares of the company under IPO. ABC announced buyback at Rs 900. Here the original issue price of the shares was Rs 100.

In this scenario, ABC would be paying 20 per cent buyback tax on Rs 800 (i.e. Rs 900 – Rs 100). It would be pertinent to note that Mr B would have already paid a long-term/short-term capital tax (@10%/15%) when he sold the shares to Mr A on the difference between Rs 500 less Rs 100. Total tax to the government kitty in this case would be Rs 200 (i.e. 20 per cent tax on 800 paid by ABC and 10 per cent tax on Rs 400 paid by Mr B). This would result in double taxation. The question is whether this is unintended or intentional?

Views

By extending the provisions of buyback tax to listed companies, the government may discourage listed companies from going through the buyback route. With this amendment, even genuine cases would be impacted.

Introduction of buyback tax is expected to increase the dividend payouts from listed companies, particularly from those that have been resorting to buybacks to avoid tax incidence. If one is a long term-investor, higher dividend payouts can prove to be more beneficial to you.

Why is it important?

Buybacks can be done either through the tender route or via open market purchases. In the former, the company fixes a buyback price and accepts shares on a proportionate basis during the buyback period.

Hence the ‘acceptance ratio’ plays a role in deciding how much of your holdings you can actually sell. This implies that you may not be able to participate fully in buybacks. Hence dividend payouts are a better deal for investors, as the surplus is paid out to all shareholders based on their holdings.