Taxability on Buyback of Shares by Domestic Companies

Buy-back is a corporate action in which a company buys back its shares from the existing shareholders usually at a price higher than the market price. When it buys back, the number of shares outstanding in the market reduces. A buyback allows companies to invest in themselves.

Section 115QA of the Income Tax Act, 1961 regulates taxability on buying back shares. Further, income tax is levied on these shares. Buyback shares constitute a repurchase of existing company shares.

Tax liability on Buyback of shares under sec 115QA for Company

As per section 115QA, any amount of distributed income by the company on the buy-back of shares from a shareholder shall be charged to tax.

The effective rate of tax levied is 23.296% (20% + 12% SC + 4% Health and Education Cess). This tax is known as ‘Buy-Back Tax’ or ‘Buy-Back Distribution Tax’ (BDT).

Distributed Income = Consideration paid by the company on account of buyback – amount received by the company for the issue of such shares.

115 QA of Income Tax Act, 1961 states that both listed and unlisted companies will have to pay additional income tax.

Furthermore, the company is required to pay taxes within a 14 days period. These 14 days are calculated from the payment date to shareholders after getting paid for buying back shares.

In the case the tax is not paid within the due date, the company is liable to pay simple interest at the rate of 1% per month on the amount of the tax for the period starting from the last date on which such tax should have been paid.

What is the provision when Sec 115QA is not applicable

When the listed company has announced the buyback of its shares.
The announcement is made per the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018.

TAXABILITY ON BUYBACK OF SHARES ON SHAREHOLDERS

Provision of sec 10(34A)

The Income arising to the shareholder on account of buyback shares by the company is exempted from income tax. Only the company has paid tax as per the provision of section 115QA.

Example

Delta Ltd repurchases 500 shares in August 2019, with a market price of Rs. 650 with an issue price of Rs. 50.

The company is now liable for a buyback tax of 23.296% (effective rate of tax) on the distributed income that is Rs. 600, the difference between market price and issue price (650-50).

The individual shareholders are no longer liable to pay taxes.

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