{"id":6420,"date":"2019-10-07T10:08:21","date_gmt":"2019-10-07T04:38:21","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=6420"},"modified":"2021-03-02T17:24:37","modified_gmt":"2021-03-02T11:54:37","slug":"buyback-tax","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/buyback-tax\/","title":{"rendered":"Buyback Tax: Everything you Need to Know About It"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Lately, the corporate market got filled with a sudden buzz regarding the buyback tax. It all started when the Finance Minister, Nirmala Sitharaman, proposes to levy a tax on the buyback by the listed companies. Earlier all the unlisted companies were following such act, but now even the listed companies are obliged to pay 20% tax on buybacks.\u00a0 Allegedly, the amendments are made to restrain the misuse of the buyback to avoid taxes.\u00a0 The reports of the previous year showcase an accurate picture of corporate who have been using buybacks to return their money to shareholders rather than dividends. Since dividends attract distribution tax, thus this new provision puts an end to tax arbitrage. \u00a0<\/p>\n\n\n\n<div class=\"wp-block-button aligncenter\"><a class=\"wp-block-button__link has-background\" href=\"https:\/\/swaritadvisors.com\/buyback-of-shares\" style=\"background-color:#01669c\">Increasing Earning Per Share with  Buyback of Shares  &#8211; Register Now<\/a><\/div>\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-6a3b1e927e3a4\" 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-6a3b1e927e3a4\"  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\/learning\/buyback-tax\/#What_is_Buyback_and_how_it_is_useful\" title=\"What is Buyback and how it is useful? \">What is Buyback and how it is useful? <\/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\/learning\/buyback-tax\/#Existing_Provision_of_Buyback_Tax\" title=\"Existing Provision of Buyback Tax \">Existing Provision of Buyback 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\/learning\/buyback-tax\/#Amendments_in_the_Buyback_Tax\" title=\"Amendments in the Buyback Tax \">Amendments in the Buyback Tax <\/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\/learning\/buyback-tax\/#Tax_Rate_of_Buyback_for_Unlisted_Shares\" title=\"Tax Rate of Buyback for Unlisted Shares\">Tax Rate of Buyback for Unlisted 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\/learning\/buyback-tax\/#Tax_Rate_of_Buyback_for_Listed_Shares\" title=\"Tax Rate of Buyback for Listed Shares \">Tax Rate of Buyback for Listed Shares <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/learning\/buyback-tax\/#Final_Thoughts\" title=\"Final Thoughts\">Final Thoughts<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_Buyback_and_how_it_is_useful\"><\/span>What is Buyback and how it is useful? <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A buyback of equity share is a mode of restructuring the\ncapital. It is an efficient scheme through which a company repurchases its\noutstanding share to decrease the number of available shares in the open\nmarket. Buyback enables companies to charge a valid value for their shares; for\ninstance, a company having undervalued shares can do a buyback to render\ninvestors along with a return. &nbsp;<\/p>\n\n\n\n<p>A buyback will not only bullish on the current operations of\nthe company, but also it will inflate the proportion of earnings shares. Hence\nincrease the stock price if the company maintains the same ratio of\nprice-to-earnings.<\/p>\n\n\n\n<div class=\"browse\">\n<p>Browse through our articles on services provided at <a href=\"https:\/\/swaritadvisors.com\">Swarit Advisors<\/a>, and just let us know if we can help you with your IPO or Comapny Takeover or SEBI Advisory Services.<\/p>\n<div class=\"browse1\">\n<table class=\"table1\">\n\n<tbody>\n<tr>\n<td><a href=\"https:\/\/swaritadvisors.com\/mergers-and-acquisitions\"><span>Mergers and Acquisitions<\/a>&nbsp;<\/span><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/buyback-of-shares\"><span>Buyback of Shares<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/merger-and-amalgamation\"><span>Merger and Amalgamation<\/span><\/a><\/td>\n<\/tr>\n<tr>\n<td><a href=\"https:\/\/swaritadvisors.com\/public-issues\"><span>Public Issues<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/rights-issue\"><span>Rights Issue<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/preferential-allotment\"><span>Preferential Allotment<\/span><\/a><\/td>\n<\/tr>\n<tr>\n<td><a href=\"https:\/\/swaritadvisors.com\/company-takeover\"><span>Company Takeover<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/issue-of-debentures\"><span>Issue of Debentures<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/insurance-broker-license\"><span>Insurance Broker License<\/span><\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Existing_Provision_of_Buyback_Tax\"><\/span>Existing Provision of Buyback Tax <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The government established the concept of buyback tax under\nSec 115QA vide the Finance Act 2013. Here are the guidelines of buyback tax: <\/p>\n\n\n\n<ul><li>A Tax rate of 20 percent levied on the amount of income distributed by unlisted companies. Distributed income refers to the \u201cdifference between the considerations paid by the company on <a href=\"https:\/\/swaritadvisors.com\/buyback-of-shares\" class=\"text-primary\"><strong>buyback of shares<\/strong><\/a><strong> <\/strong>less the amount which was received by the company for issue of such shares.\u201d <\/li><li>One noticeable thing about the act is that it was only applicable to unlisted companies and not listed entities. <\/li><li>As the listed firms do not get bound by any legal restrictions, they got involved in many fraudulent activities like avoiding dividend distribution, tax arbitrage for domestic as well as global investors, etc. <\/li><li>So the aftereffects of previous buyback tax compel the government to take strict actions against the listed organization.<\/li><\/ul>\n\n\n\n<p><strong>Also, Read:<\/strong> <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<\/a><\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Amendments_in_the_Buyback_Tax\"><\/span>Amendments in the Buyback Tax <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>New amendments brought by the Financial Bill No. 2 2019, has\nproved to be a pivotal event for the listed companies.&nbsp; Let\u2019s have a thorough look at the new\namendments to the buyback tax:<\/p>\n\n\n\n<ul><li>Now, the buyback of shares has to be levied by the listed companies. <\/li><li>If any company purchases its shares from shareholders, it shall not be considered as a dividend because the government has excluded it under section 2(22) (iv) of the Income Tax Act. <\/li><li>It resulted in section 115-O, \u2018Dividend Distribution Tax shall not be attracted.\u2019<\/li><li>Government has passed separate amendments for unlisted companies and listed companies categorized as:<\/li><\/ul>\n\n\n\n<ol><li>Buy Back of Unlisted Shares<\/li><li>Buy Back of Listed Shares<\/li><\/ol>\n\n\n\n<ul><li>A convenient way to identify the amendments is\nby comparing the before and after impact of revised act on both the shares. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Tax_Rate_of_Buyback_for_Unlisted_Shares\"><\/span>Tax Rate of Buyback for Unlisted Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Following is the tax rate for unlisted shares:<\/p>\n\n\n\n<ul><li>Section 150QA of the Finance Act provides for levy of additional tax at a 20% rate of the distributed income on account of a buyback of unlisted shares by the company.&nbsp; <\/li><li>An additional <strong><a href=\"https:\/\/swaritadvisors.com\/income-tax-return-filing\" class=\"text-primary\">income tax<\/a><\/strong> gets levied at the level of the company, the resultant income in the hands of shareholders got exempted from tax under section 10(34A) of the Income Tax Act. <\/li><li>Therefore, one can conclude that the Financial Bill 2019 has not brought any amendments for the buyback of shares of unlisted firms. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Tax_Rate_of_Buyback_for_Listed_Shares\"><\/span>Tax Rate of Buyback for Listed Shares <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The tax rate for listed shares is follows:<\/p>\n\n\n\n<ul><li>Section 46A of the Income Tax Act was applied to the listed shares, implying that the Normal Capital Gains (amount received in buyback \u2013 the cost of acquisition) must be computed. <\/li><li>The period of holding shall be from the date of acquisition to the buyback. <\/li><li>It was the only simple formula to calculate the capital gain on buyback of listed shares used by shareholders. <\/li><li>In such a case, if listed companies\u2019 buyback the shares, it was not compelled to pay any additional income tax.<\/li><\/ul>\n\n\n\n<p>The existing anti-abuse provision under section 115QA concerning the buyback of share from shareholders by unlisted companies consequently got extended to all the companies, whether listed or unlisted, undertaken from 5<sup>th<\/sup>\u00a0July 2019. <\/p>\n\n\n\n<ul><li>Primarily, Section 115QQA introduced as an anti-abuse provision. Its chief motive was to keep a check on the illegal practice of unlisted entities, i.e., resorting to buyback of shares instead of payments of the dividend. <\/li><li>This practice of abuse was widely perceived amongst the unlisted companies wherein the taxpayers opted for tax avoidance.<\/li><li>As some similar activities of tax arbitrage emerged in the listed shares, the government has no option than to apply the same act for listed companies as well.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Final_Thoughts\"><\/span>Final Thoughts<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In a nutshell, the introduction of the buyback tax has proven to be an outrageous deed for the listed companies who now cannot pursue their illicit acts. The proposed amendments were indispensable to curb the incidents of resorting to buybacks to avoid income tax. In the prospect, there will be an increase in dividend payouts as compare to buybacks. There will be a state of a mess if another proposal of the government recommending <a href=\"https:\/\/www.sebi.gov.in\/\">SEBI<\/a> to increase the public shareholding in listed companies from 25% to 35% get approved along with buyback tax extension, but for now, not many issues are reported. <\/p>\n\n\n\n<p><strong>Also, Read:<\/strong> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/learning\/procedure-for-buyback-of-shares-and-other-specified-securities\/\">Procedure for Buyback of Shares and Other Specified Securities<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Lately, the corporate market got filled with a sudden buzz regarding the buyback tax. It all started when the Finance Minister, Nirmala Sitharaman, proposes to levy a tax on the buyback by the listed companies. Earlier all the unlisted companies were following such act, but now even the listed companies are obliged to pay 20% [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":6426,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1117,546],"tags":[1120],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6420"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=6420"}],"version-history":[{"count":19,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6420\/revisions"}],"predecessor-version":[{"id":18130,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6420\/revisions\/18130"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/6426"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=6420"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=6420"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=6420"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}