BUY BACK OF SHARES
TAXABILITY OF BUYBACK OF SHARES OF COMPANIES AS AMENDED BY FINANCE (NO. 2) ACT 2019 AND TAXATION LAWS (AMENDMENT) ORDINANCE, 2019.
EXISTING PROVISION OF TAX ON BUY BACK OF SHARES
The government introduced the concept of buyback tax under Sec 115QA vide the Finance Act 2013, wherein tax at the rate of 20 per cent (excluding surcharge and cess) was levied on the amount of income distributed by unlisted companies to the shareholders in the form of buy back of unlisted shares. Consequent to levy of tax u/s 115QA paid by the company, the amount of consideration received by the shareholder is exempt as per the provision of Section 10(34A) of the Act. In other words, the liability to pay tax on the event of buy back has shifted from the shareholders to the company.
The term ‘distributed income’ means the difference between considerations paid by the company on buyback less the amount received by the company on issue of such shares.
It is pertinent to note that this tax was applicable to income distribution by unlisted companies, and not listed companies. In other words, income distributed by listed companies was not covered under the purview of buyback tax. Instead, shareholders were liable to capital gains tax on the same.
AMENDMENT MADE BY FINANCE ACT (NO.2) 2019
The Finance (No. 2) Act, 2019 had extended the provisions of section 115QA and section 10(34A) have been extended by the Finance (No. 2) Act, 2019 to the shares of listed companies with effect from 05-07-2019.
The Explanatory Memorandum to Finance (No. 2) Bill, 2019 explains the above amendments as under:
This section was introduced as an anti-abuse provision to check the practice of unlisted companies resorting to buy-back of shares instead of payment of dividends. This practice of widespread abuse was noted, in the past, amongst unlisted companies where the taxpayers preferred it for tax avoidance, as tax rate for capitals gains was lower than the rate of Dividend Distribution Tax (DDT). However, instances of similar tax arbitrage have now come to notice in case of listed shares as well, whereby the listed companies are also indulging in such practice of resorting to buy-back of shares, instead of payment of dividends.
In order to curb such tax avoidance practice adopted by the listed companies, the existing anti abuse provision under Section 115QA of the Act, pertaining to buy-back of shares from shareholders by companies not listed on a recognised stock exchange, is proposed to be extended to all companies including companies listed on recognised stock exchange. Thus, any buy-back of shares from a shareholder by a company listed on recognised stock exchange, on or after 5th July 2019, shall also be covered by the provision of section 115QA of the Act and would be liable to pay additional income tax at the rate of 20 percent. Accordingly, it is also proposed to extend exemption under clause (34A) of section 10 of the Act to shareholders of the listed company on account of buy-back of shares on which additional income-tax has been paid by the company.
AMENDMENT MADE BY TAXATION LAWS (AMENDMENT) ORDINANCE, 2019
The amendment by the Finance (No. 2) Act, 2019 extended the tax under section 115QA to all buy-back of shares by listed companies on or after 05-07-2019 irrespective of whether public announcement was made by listed company prior to 05-07-2019. This caused undue hardships to those listed companies whose buy-backs were announced on or before 05.07.2019.
In order to provide relief to listed companies which have already made a public announcement of buy-back before 5th July 2019, the Ordinance inserts a proviso in sub-section (1) of Section 115QA of the Act to provide that tax on buy-back of shares in case of such companies shall not be charged under section 115QA.
WHETHER BUY-BACK OF LISTED SHARES ARE EXEMPT IN SHAREHOLDER’S HANDS U/S 10(34A) IF MADE ON OR AFTER 05-07-2019 FOR WHICH PUBLIC ANNOUNCEMENT WAS MADE BEFORE 05-07-2019?
In order to provide relief to listed companies which have already made a public announcement of buy-back before 5th July 2019, the Ordinance inserts a proviso in sub-section (1) of Section 115QA of the Act to provide that tax on buy-back of shares in case of such companies shall not be charged under section 115QA. However, no corresponding amendment has been made by the Ordinance to section 10(34A) to bring the buy-back consideration to tax in shareholder’s hands in such cases.
In terms of amendment made by the Finance (No. 2) Act, 2019, any buy-back made on or after 05-07-2019 by listed company shall be exempt in the hands of shareholders. This is regardless of whether public announcement was made prior to 05-07-2019. The position continues unchanged even after the Ordinance.
The position is summarised as under:
|Public announcement for buy-back of shares when made by listed co||Buy-back of shares when made by listed co.||Taxability in company’s hands u/s 115QA||Treatment of buyback consideration in shareholder’s hands u/s 10(34A)|
|Before 05-07-2019||Before 05-07-2019||Not taxable||Not exempt. Taxable in shareholder’s hands|
|Before 05-07-2019||On or after 05-07-2019||Not taxable [Proviso to section 115QA(1) inserted by the Ordinance]||Any income arising to shareholder from buy-back of listed shares on or after 05-07-2019 is tax-exempt u/s 10(34A) of the Act. No change made by Ordinance in this.|
|On or after 05-07-2019||On or after 05-07-2019||Taxable||Exempt u/s 10(34A)|
Compiled By CA DHANUSH D BOLAR.
DATE: 30th November 2019.