The Finance (No.2) Bill, 2024 has introduced a chain of amendments for shifting the tax burden on buy-back of shares from the company to its shareholders. The scheme of amendments is given below:
(i) Section 2(22)(f) has been inserted w.e.f. 01.10.2024 to state that any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 is taxable as dividend. The important aspect is “any payment“. Sub-clause (iv) in the long line is omitted by the Finance (No.2) Bill, 2024 and it is actually incorporated as sub-clause (f) of section 2(22).
(ii) The Finance (No.2) Bill, 2024 proposes to omit section 10(34) which provided exemption in respect of any income arising to an assessee, being a shareholder, on account of buy-back of shares is exempt. The key expression is “any income”.
(iii) The Finance (No..2) Bill, 2024 proposes to insert a proviso w.e.f. 01.10.2024 to provide that where a shareholder receives any consideration of the nature referred to in sub-clause (f) of section 2(22) from any company, in respect of any buy-back of shares, on or after 01.10.2024, then for the purposes of section 46A, the value of consideration received by the shareholder shall be deemed to be “nil’.
Previously, section 46A was not operative because of section 10(34) which provided blanket exemption from tax.
(iv) The Finance (No.2) Bill, 2024 proposes to insert a further proviso to section 115QA whereby it would not apply in respect of any buy-back of shares that takes place on or after 01.10.2024.
Previously, the companies were paying tax on buy-back of shares because of section 115QA and correspondingly the shareholders enjoyed exemption because of section 10(34).
Key Provisions of the Amendment
1. Taxation of Buybacks: Buybacks will now be considered deemed dividends and subjected to tax in the hands of shareholders. This aligns the tax treatment of buybacks with that of traditional dividends.
2. Threshold and Conditions: The amendment specifies a threshold and conditions under which buybacks will be treated as deemed dividends. Companies exceeding the specified limit will fall under this new regime.
3. Compliance and Reporting: Enhanced compliance and reporting requirements have been introduced for companies undertaking buybacks, ensuring transparency and adherence to the new tax norms.
Implications for Companies and Shareholders
1. Tax Burden Shift: The tax burden shifts from the company to the shareholders, potentially impacting investor sentiment and the attractiveness of buybacks as a corporate strategy.
2. Financial Planning: Companies will need to reassess their financial strategies and capital allocation plans, considering the tax implications of buybacks versus dividends.
3. Investor Impact: Shareholders, especially high-net-worth individuals and institutional investors, may experience changes in their tax liabilities and returns on investment.
Rationale Behind the Amendment
The government’s rationale for this amendment is multifaceted:
1. Revenue Mobilization: By taxing buybacks as deemed dividends, the government aims to mobilize additional revenue.
2. Equity in Taxation: This move seeks to bring parity between the taxation of buybacks and dividends, preventing companies from favoring one over the other for tax advantages.
3. Curbing Tax Avoidance: The amendment addresses potential loopholes and tax avoidance strategies employed by companies using buybacks.
Understand with the help of an example
- 100 shares bought in 2020 @Rs. 40/- per share
- Total cost of acquisition Rs. 4000/-
- 20 shares bought back in 2024 @Rs. 60/- per share
- Income taxable as deemed dividend Rs. 1200/- and taxable as per slab
- Capital loss on such buyback (Rs. 40 *20) Rs. 800/-
This loss can be offset when there is a capital gain from equity. It can also be carried forward,
- 50 Shares sold in 2025 @Rs. 70 per share
- Capital Gain (3500 – 2000) Rs. 1500
- Chargeable capital gain after set off Rs. 700 (1500-800)
Earlier:
- Buyback was tax free (company would pay 20% tax): Rs. 1200
- Tax on Rs. 1500 at the rate of 10%: Rs. 150 + Rs 6 (4% of Rs. 150). So net gain = Rs. 1344.
- Total gain: Rs. 1200 + Rs. 1344 = Rs. 2544
Now:
- 1200 buyback will be taxed as per slab
- Assuming a Rs. 10 Lakhs income in the new tax regime, this Rs. 1200 will incur an additional tax of Rs. 187
- Net gain from buyback = Rs. 1013.
- Tax on Rs. 700 (net capital gain) at the rate of 12.5%: Rs.87.5 + Rs 3.5 (4% of Rs. 87.5).
- So net gain = Rs. 1500 (actual captial gain) minus Rs. 91 = Rs. 1409
- Total gain: Rs. 1013 + Rs. 1409 = Rs. 2422
- Effective loss: Rs 2544 – Rs. 2422 = Rs 122. The effective loss can be significant or otherwise depending on the income slab, the actual capital gain, the buy back price etc.
The new provisions with respect to taxability of shares will become applicable with effect from 1st October, 2024. As a result, the buyback of shares which are under process and can be completed before 30.09.2024 will be taxable in accordance with the old provisions.
Conclusion
The Budget of July 2024’s reclassification of share buybacks as deemed dividends marks a significant shift in the Indian tax landscape. While it aims to create a level playing field and augment revenue, it necessitates careful consideration and strategic planning by companies and investors. As the corporate world adapts to these changes, the true impact of this amendment will unfold, shaping the future of corporate financial management and investor behavior in India.
Navigating these changes will require companies to stay abreast of regulatory updates and engage in proactive financial planning to optimize their capital strategies in this new tax environment.
