{"id":3914,"date":"2021-04-07T06:46:52","date_gmt":"2021-04-07T06:46:52","guid":{"rendered":"https:\/\/swaritadvisors.com\/blog\/?p=3914"},"modified":"2021-04-07T06:48:25","modified_gmt":"2021-04-07T06:48:25","slug":"tax-liability-on-buyback-of-shares","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/blog\/tax-liability-on-buyback-of-shares\/","title":{"rendered":"All You Need to Know About Tax Liability on Buyback of Shares"},"content":{"rendered":"\n<p class=\"has-drop-cap\">In India, Buyback of Shares is not a new idea to the Capital Market. Currently, achievement in the corporate world has observed a huge amount of <a href=\"https:\/\/swaritadvisors.com\/buyback-of-shares\" class=\"text-primary\"><strong>Buyback of Shares<\/strong><\/a> by cash-rich entities, mostly in IT Sectors such as Wipro, TCS, and others. In common phrasing, Buyback of Shares means the company purchases their shares from the present shareholders at a price decided by the Management or Board as the case may be. Coming to the aspect of Income Tax, tax liabilities on Buyback of Shares is governed by <strong><em>Section 115QA and 46 A of the Income Tax Act, 1961<\/em><\/strong>. <\/p>\n\n\n\n<p>Buyback of Shares generally\nmeans repurchasing of shares by a company that issues them. The company pays\nthe stakeholders the market value of the shares and reclaims the proprietorship\nthat was formerly distributed. Scroll down to check more information regarding\nTax liability on Buyback of Shares.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a3abafc47e75\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a3abafc47e75\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/blog\/tax-liability-on-buyback-of-shares\/#What_are_the_different_reasons_for_Buyback\" title=\"What\nare the different reasons for Buyback?\">What\nare the different reasons for Buyback?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/blog\/tax-liability-on-buyback-of-shares\/#Tax_Liability_on_Buyback_of_Shares_as_per_the_Provisions_of_Income_Tax\" title=\"Tax\nLiability on Buyback of Shares as per the Provisions of Income Tax\">Tax\nLiability on Buyback of Shares as per the Provisions of Income Tax<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/blog\/tax-liability-on-buyback-of-shares\/#Illustration_of_Tax_Liability_on_Buyback_of_Shares\" title=\"Illustration\nof Tax Liability on Buyback of Shares\">Illustration\nof Tax Liability on Buyback of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/blog\/tax-liability-on-buyback-of-shares\/#Effects_of_Amendments_%E2%80%93_Tax_Liability_on_Buyback_of_Shares\" title=\"Effects\nof Amendments &#8211; Tax Liability on Buyback of Shares\">Effects\nof Amendments &#8211; Tax Liability on Buyback of Shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/blog\/tax-liability-on-buyback-of-shares\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_different_reasons_for_Buyback\"><\/span><strong>What\nare the different reasons for Buyback?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A company increase the share\ncapital by distributing shares &amp; raising capital. Hence, it might seem\ndiffering for companies to Buyback the shares and pay money to stakeholders.\nFollowing are the reasons for the same:<\/p>\n\n\n\n<ol><li><strong><em>Compact\nOwnership<\/em><\/strong>: Significant shareholding indicates widespread\nownership and higher company costs. So, to serve both the motives, that is, to\nbring solidity in ownership and reduce the capital cost, Buyback of Shares\ncomes into the depiction.<\/li><li><strong><em>Attractive\nFinancials<\/em><\/strong>: Buyback of Shares can also make the financials\nof the company more attractive. With a decreased number of shares, the company\u2019s\n<strong><em>Earning\nper Share<\/em><\/strong> looks more attractive.<\/li><li><strong><em>Share\nPrice Correction<\/em><\/strong>: The price of the shares in the market can be\nextremely underrated due to different reasons. So, a buyback backings the\ncorrection of the market price.<\/li><li><strong><em>Improved\nShareholding of Promoters<\/em><\/strong>: Buyback is used if the\ncompany\u2019s promoters are planning to increase their shareholding.<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Tax_Liability_on_Buyback_of_Shares_as_per_the_Provisions_of_Income_Tax\"><\/span><strong>Tax\nLiability on Buyback of Shares as per the Provisions of Income Tax<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The Income Tax provision with regard to tax liability on Buyback of shares is covered under <strong><em>Section 115 QA of the <\/em><\/strong><em><strong>Finance Act, 2013<\/strong><\/em><sup><a href=\"https:\/\/www.cbic.gov.in\/htdocs-servicetax\/chap6-finact2013\" class=\"text-primary\"><strong>[1]<\/strong><\/a><\/sup><strong><em>, <\/em><\/strong>which applied to unlisted entities only, which assured a tax of 20 per cent on the distributed income.<\/p>\n\n\n\n<p>The reasoning for the\nintroduction of the provision was that unlisted entities resorted to Buyback of\nShares in order to escape <strong><em>the Dividend Distribution Tax<\/em><\/strong>. As\nthe Buy Back was charged as capital gains in the hands of the member, and Dividend\nDistribution Tax was imposed on the company. Therefore the modification was\nintroduced as an anti-tax avoidance measure.<\/p>\n\n\n\n<p>The Union Budget 2019 stated the said section to be applicable to the listed companies as well. The amendment is effective for all buybacks post-July 05, 2019, vide Finance Act (No. 2) 2019.<\/p>\n\n\n\n<table class=\"table table-bordered\">\n<tbody>\n<tr>\n<td>\n<p style=\"text-align: center;\"><strong><em>Provisions<\/em><\/strong><\/p>\n<\/td>\n<td style=\"text-align: center;\" width=\"208\">\n<p><strong><em>Listed Companies<\/em><\/strong><\/p>\n<\/td>\n<td>\n<p style=\"text-align: center;\"><strong><em>Unlisted Companies<\/em><\/strong><\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p>Buyback tax<\/p>\n<\/td>\n<td>\n<p>As per Finance (No 2) Act 2019, this tax is applicable to all Listed Companies or entities resorting to Buyback of Shares post-July 5, 2019.<\/p>\n<\/td>\n<td>\n<p>Applicable after the Finance Act, 2013.<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td>\n<p>Capital Gains Tax<\/p>\n<\/td>\n<td>\n<p>No longer valid for the investor.<\/p>\n<\/td>\n<td>\n<p>Since the Finance Act, 2013, it is no longer applicable to the investor.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Illustration_of_Tax_Liability_on_Buyback_of_Shares\"><\/span><strong>Illustration\nof Tax Liability on Buyback of Shares<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The\nbelow-mentioned illustration will bring clearness to the modifications effected\nby the amendments. <\/p>\n\n\n\n<ol><li>A listed entity called Delta Ltd repurchased\n1000 shares in the month of May 2019 (before amendment) at the existing market\nprice of Rs. 500. The issue price for the shares is Rs. 50.<\/li><li>No tax liability on Buyback of Shares for Delta\nLtd. Company;<\/li><li>Separate shareholders should pay capital gains\ntax (Short or Long Term) depending on the holding price of shared on the\ndifference amount (Issue Market Price), i.e. Rs. 500 \u2013 Rs. 50 = Rs. 450.<\/li><li>In August 2019, Delta Ltd. Company again\npurchased 500 shares (post amendment), with a market price of Rs. 650 with an\nissue price of Rs. 50.<\/li><li>Now, the company\u2019s tax liability on Buyback of\nshares is 20% on the distributed income, i.e., Rs. 600, the difference between\nissue and market prices, i.e. (650-50).<\/li><li>The separate shareholders are no longer liable\nto pay taxes.<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Effects_of_Amendments_%E2%80%93_Tax_Liability_on_Buyback_of_Shares\"><\/span><strong>Effects\nof Amendments &#8211; Tax Liability on Buyback of Shares<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The\nproposed amendment brings at par both the ways of distribution of income, that\nis, Buyback of Shares and dividend payout. Actually, companies will now\nrepresent a better preference for the dividend payout as the rules of the\nBuyback is more relevant to the unlisted entities. The calculation of the\namount received by the company for the issue of the shares will lead to\nillogical outcomes for listed companies.<\/p>\n\n\n\n<p>Another\nanxiety that the amendment raises the shares of listed entities being tradeable\npass through various hands. Every time a member sells their shares, they will\nexperience long or short term capital gains on the disparity price (Market\nPrice-Purchase Price). When a company buys back the shares, it again suffers\ntax on different price (Market Price \u2013 issue Price). Hence, there is an\nopportunity for double taxation. A similar happening is less likely in the case\nof unlisted entities. The company with extra funds and no feasible investment\nchance to invest in will distribute the excess. While buyback and dividend\npayout both outcome in payouts, Buyback permits a minor shareholding and\ngreater Earnings Per Share also compact ownership. With the current amendment,\nthe tax consequences will have to consider all the aspects prior to\ndistributing its excess either by dividend payout or Buyback.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Buyback of shares is not a new concept to the capital market in India. In India, income tax on Buyback of shares is governed under Section 46A and Section 115 QA of the Income Tax Act, 1961. I hope that this article brings clarity on Income tax implications in the buyback transactions.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/blog\/process-for-buyback-of-shares\/\">Process for Buyback of Shares in India: A Guide\n<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In India, Buyback of Shares is not a new idea to the Capital Market. Currently, achievement in the corporate world has observed a huge amount of Buyback of Shares by cash-rich entities, mostly in IT Sectors such as Wipro, TCS, and others. In common phrasing, Buyback of Shares means the company purchases their shares from [&hellip;]<\/p>\n","protected":false},"author":6,"featured_media":3922,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[64],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/3914"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/comments?post=3914"}],"version-history":[{"count":16,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/3914\/revisions"}],"predecessor-version":[{"id":3932,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/posts\/3914\/revisions\/3932"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media\/3922"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/media?parent=3914"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/categories?post=3914"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/blog\/wp-json\/wp\/v2\/tags?post=3914"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}