What is Buyback?
Stock buyback refer to the repurchasing of shares or stock by the company that issued by them.
A buyback occurs when the issuing company pays the shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors.
When will a company opt for buy back of shares?
1. When the quoted price of the shares on stock exchange does not represent the true value of the shares
2. For investing companies accumulated funds with a view to return the capital
3. To increase the promoter’s shareholdings in the company
Reason behind introducing the buyback provision
Earlier, the declared dividend is chargeable to Dividend Distribution Tax (DDT), whereas, 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 rate on buyback of shares.
In this situation, analysing the benefits, unlisted companies started resorting to buyback of shares instead of declaring dividends in order to avoid tax. 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 are amended and the same is made applicable to the listed companies also. The amended to section 115QA basically aims to bring the tax on dividend and the tax on buy-back of shares at par.
Tax treatment of Buy back of shares u/s 115QA
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.
Conditions in which Section 115QA is not applicable
The provisions of Section 115QA does not apply when all the below mentioned conditions are satisfied:
Due Date of Payment of Tax in case of buy back of shares
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.
Income charged under Section 115QA shall not be allowed any deduction under any other provisions of the Act either to the company or shareholders.
Example: ABC originally issued shares for Rs 10. The shareholder bought the shares at Rs 400. The company ABC goes for buy-back of shares at Rs 700. In such case, as per Section 115QA, tax is payable on Rs 690 (Rs 700 –Rs 10).
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