Share buyback: Know what the amended Section 115 QA says

By Poonam Gandhi

In simple terms, buyback of shares means a situation when the company repurchases its own shares. A company may opt to buy back the shares under any one of 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 buyback of shares with a view to return the capital; or

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

Let us look at the reason behind introducing the buyback provisions under the income tax laws. A company which has distributable surplus has the following two options:

*Declare dividend; or

* Purchase its own shares (i.e. buyback 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 buyback of shares.

In order to avoid the tax, unlisted companies started resorting to buyback 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 were amended and the same is made applicable to the listed companies also. The amended Section 115QA basically aims to bring the tax on dividend and the tax on buyback of shares at par.
The salient features of Section 115QA (along with the recent amendments) are:

The company (both listed and unlisted company) is liable to pay additional income tax on an amount of distributed income on buyback of shares from shareholders. The company is liable to pay tax at 20% plus surcharge at 12% plus applicable cess.

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

* The company is listed on the recognized stock exchange; and

* The company has announced buyback its shares; and

*The public announcement has been made before July 5, 2019; and the public announcement is done in accordance with the provisions of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018.

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 buyback 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 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.

As an example, suppose XYZ originally issued shares for Rs 10. The shareholder bought the shares at Rs 400. The company XYZ goes for buy-back of shares at Rs 600. In such case, as per Section 115QA, tax is payable on Rs 590 (Rs 600 –Rs 10).

The writer is a chartered accountant.
Source: Tax Guru