On a
historic day i.e. on 5th July 2019, Finance minister Nirmala
Sitharaman presents her maiden budget in Modi Government version 2.0 Amongst
the amendments proposed by the Finance Minister in Budget 2019-20, one of the
amendment relates to the imposition of additional tax on buyback of shares by
the listed companies.
Buyback (also
known as Stock repurchasing) refers to purchase of own shares by the companies
from the shareholders. There
may be variety of reasons for resorting to buyback of shares. A few of the
reasons are illustrated as under:
- Improve
the earnings per share,
- Provide
exit route to shareholders when shares are undervalued or are thinly traded,
- Achievement
of optimum capital structure,
- Mechanism
of undertaking capital reduction without complex NCLT route,
- Reduction
in promoter shareholding for meeting threshold of minimum public
shareholding.
Buyback VS Dividend (Before Budget)
Generally Companies opt either buyback or dividend to distribute
surplus. Dividend
payment is subject to DDT for companies and corresponding dividend income has
been exempt from tax under sec 10(34) of the Act (till AY 2016-17) in the hands
of shareholders. However, from AY 2017-18, dividend exceeding INR 10 Lakhs is
taxable under sec 115BBDA of the Act for certain class of assessees.
Section
115BBDA of income tax is “Triple Taxation”, first company is paying
income tax under normal provisions on its income. Secondly, when the company is
distributing the same profit to the owners / shareholders then the company is
also paying Dividend Distribution Tax u/s 115-O. Thirdly, when the shareholder receives the same dividend in aggregate of
more that Rs. 10 lakhs, then such share holder have also to pay Income Tax.
So
Buyback was preferred option for companies. Government introduced section 115QA
for unlisted companies from 01-06-2013, Sec 115QA was introduced as an anti-abuse
provision to check practice of unlisted companies resorting to buyback of
shares instead of payment of dividends wherein shareholders were either paying
lower tax or no tax. Sec 115QA provided that consideration paid for purchase of
its own unlisted shares in excess of the sum received at the time of issue of
such shares (distributed income) will be charged to additional income tax
(buyback tax) @ 20 percent (plus applicable surcharge and cess). Such tax was
on similar lines as DDT and income arising to the shareholders in respect of
such buyback was exempt under sec 10(34A) of the Act.
All
the major Indian IT services companies have opted for repurchase of shares in
the last three years in order to give back their surplus cash to their
shareholders. For instance, Infosys is currently conducting a share buyback of
Rs 8,260 crore for the second consecutive year after executing a buyback of Rs
13,000 crore in FY18. Similarly, market leader Tata Consultancy Service (TCS)
has also conducted two consecutive buybacks of Rs 16,000 crore each in last two
fiscal years. Among others, Wipro and HCL Technologies have also conducted
share repurchase programmes as part of their capital allocation policies.
Summarising
the tax treatment of buyback of shares from 01-06-2013 onwards:-
- Buyback of shares of listed company was
liable to tax as capital gain/loss (long term - 10% or 20% and short term 15%).
Tax Type
|
Condition
|
Tax applicable
|
Long-term capital gains tax
|
Except on sale of equity shares/ units
of equity oriented fund
|
20%
|
Long-term capital gains tax
|
On sale of Equity shares/ units of
equity oriented fund
|
10% On sale of Equity shares/ units of
equity oriented fund
|
Short-term capital gains tax
|
When
securities transaction tax is not applicable
|
The short-term capital gain is added to
your income tax return and the taxpayer is taxed according to his income tax
slab.
|
Short-term capital gains tax
|
When securities transaction tax is applicable
|
15%
|
- Buy
back of shares of unlisted
company, company is liable to buy back tax @ 20% u/s 115QA on
[consideration less price paid by shareholders] and the corresponding income
was exempt in the hands of shareholders u/s 10(34A). If amount of consideration
reduced by the cost is a loss, then benefit of such loss was not available to
the shareholders.
What is the Amendment
The government is now of the view that listed companies are also
indulging in tax avoidance practice by resorting to buyback of shares as
opposed to dividend distribution. In order to curb such practice, anti-abuse
provisions of sec 115QA are also made applicable to listed companies vide
Finance Act (No.2), 2019 for all buybacks post 5 July 2019.
Post Budget Impact
Capital gain arises in the year in which transfer took place.
Many companies were in the planning of buyback but after the budget these
companies are consulting professionals to withdraw the buyback offer.
KPR mill, a textile company withdrew their buyback proposal
due to tax imposed on buyback obligations in the Finance Bill 2019.
ABOUT THE AUTHOR
SANDEEP SINGH CHAUHAN
Find the author on facebook - https://www.facebook.com/sandeepsingh.chauhan1
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