CA Prajakta Mondhe – [2024] 164 taxmann.com 728 (Article)
Budget 2024 has been announced on 23rd of July 2024. Indeed, this budget has brought a lot of changes in direct taxation that has impact on various age-old settled provisions. In Finance Act,2020 the government had abolished the Dividend distribution tax(‘DDT’) and had made the dividend taxable in the hands of the shareholders under the head other sources. Similar to DDT there was another tax that was applicable on the companies distributing profits by way of purchase of its own shares – the Buy Back Distribution Tax.
Erstwhile Provisions
Buy Back Distribution Tax(‘BDT’) (Section 115QA of the Income Tax Act,1961 – the ITA)
Notwithstanding anything in the ITA, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares from a shareholder was to be charged to tax and such company was to be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.
Thus, as per the above section any domestic company that would purchase its own shares, would be liable to pay tax on the distributed income at the rate of 20% plus surcharge @12% and cess@4% (Effective rate – 23.296%).
Tax shall be applicable on the distributed income meaning the consideration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed in rule 40BB of the Income Tax Rules, 1962.
Such tax was applicable irrespective of the fact that the company is liable for tax on its income or not.
Further, no credit or deduction for such amount was to be allowed either to the shareholder or the company.
Section 46A and 10(34A) of the Act
Section 46A prescribed that when a shareholder received any consideration from any company for purchase of its own shares or other specified securities, it shall be deemed to be capital gains subject to the provisions of section 48, the amount of consideration less the cost of acquisition, shall be chargeable to tax under the head capital gains.
Further, as per section 10(34A) any income arising to a shareholder on buy back of shares referred to in section 115QA, was exempt in the hands of the shareholder. The reason being that as the company has already paid the buy back distribution tax on such income, it shall not be chargeable to tax again in the hands of shareholders.
Thus, if the company was liable to pay buy back distribution tax, the income arising to the shareholder shall be exempt in the hands of shareholder.
| Buy back of shares by a domestic company | Buy Back distribution tax applicable under section 115QA | Exempt in the hands of the shareholder under section 10(34A) |
| Any other case | Buy Back distribution tax not applicable under section 115QA | Taxable under section 46A in the hands of shareholders |
Example: A company issued 15,000 shares at a price of INR 25 per share (FV – INR 10) on 08th April 2015. Subsequently in April 2022, the company bought back 10,000 shares out of them at a price of INR 40 per share. Now in this case the company is paying INR 15(INR 40-25) per share of buy back premium. This shall be liable to Buy back distribution tax at the rate of 23.296%. So, the company would pay tax of INR 34,944 (10,000*15*23.296%) as per section 115QA.
The income shall be exempt in the hands of shareholders under section 10(3A).
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