The Income Tax Act, 1961, contains several provisions to ensure proper tax compliance by companies & individuals in India. One such crucial provision is Section 115QA of the Income Tax Act, which pertains specifically to the tax on the buyback of shares by companies.
A buy-back of shares is a corporate action where a company repurchases its shares from the existing shareholders, reducing the number of outstanding shares in the market. To bring parity in taxation & avoid tax avoidance, the government introduced Section 115QA to ensure that such buybacks are subject to tax.
What is Section 115QA of the Income Tax Act?
Section 115QA of the Income Tax Act lays down the provisions for the buy-back of shares by companies. As per this section, if a company buys back its shares, it is liable to pay tax on the distributed income arising from the buyback. This tax is levied to prevent companies from distributing profits through share buybacks instead of dividends, which would otherwise attract Dividend Distribution Tax (DDT).
The buyback tax under Section 115QA applies to both listed & unlisted companies as per recent amendments, ensuring comprehensive coverage & fairness in taxation."
Applicability of Section 115QA
The provisions of Section 115QA apply when:
- A company buys back shares from its shareholders.
- The buyback results in the release of company funds to shareholders.
- The company is required to pay buyback tax on the difference between the buyback price & the issue price of shares.
The tax rate under Section 115QA of the Income Tax Act is 20% plus a surcharge of 12%, along with applicable cess. This effective tax ensures that shareholders receiving the buyback proceeds are not taxed again on the same income, as the liability shifts to the company.
Why Was Section 115QA Introduced?
Companies increasingly use the buyback of shares as a strategy to distribute profits without paying the higher tax applicable on dividends. By introducing Section 115QA, the government aimed to curb this practice & ensure that profits distributed through buybacks also attracted a fair share of tax.
This measure has not only increased transparency but also boosted tax revenues by closing a key loophole."
How is Buyback Tax Calculated under Section 115QA?
To calculate tax under Section 115QA of the Income Tax Act:
- Determine the buyback price at which the company repurchases the shares.
- Identify the issue price at which the shares were originally issued.
- Calculate the difference (buyback profit).
- Apply the tax rate of 20% plus a 12% surcharge on the buyback profit.
For example, if a company buys back shares at ₹1,000, which were originally issued at ₹600, the profit per share is ₹400. Tax is calculated on this profit.
Key Points to Remember about Section 115QA:
- It pertains to the tax on the buyback of shares.
- The provisions for the buy-back of shares are laid out.
- The tax rate is 20% plus a surcharge of 12%.
- The company, not the shareholder, is liable to pay the buyback tax.
- This applies to both listed & unlisted companies.
Impact of Section 115QA on Companies & Shareholders
The introduction of Section 115QA of the Income Tax Act has changed the dynamics of how companies distribute profits. Instead of favoring buybacks over dividends for tax savings, companies now evaluate both options carefully.
Shareholders, on the other hand, receive the buyback amount as tax-free income in their hands since the company already pays tax at the time of the transaction.
Compliance Requirements
Companies opting for a buyback of shares must ensure:
- Accurate calculation of buyback profits.
- Timely payment of tax under Section 115QA.
- Proper reporting & filing with the Income Tax Department.
Failure to comply can attract penalties & legal complications.
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