A share buyback, also known as a stock repurchase, is a corporate measure in which a company repurchases its own shares from existing shareholders, usually at a price higher than the market value. This action decreases the number of outstanding shares in the market, potentially increasing the value of the remaining shares and enhancing financial metrics such as earnings per share.
Existing Provisions Under the Income-tax Act, 1961 (‘the Act’)
When a company buys back its own shares, it is subject to a flat tax rate of 20% (plus surcharge and cess) under Section [115QA] of the Act. This “buyback tax” is imposed on the ‘distributed income’, in addition to any other taxes owed by the company.
Distributed income’ is the variance between the amount payable on buyback and the original amount received on the issuance of shares.
Any resulting income from the buyback of shares is tax-exempt for shareholders under section [10(34A)](javascript:void(0);) of the Act.
Rationale behind these amendments
The Finance Minister, in the 2024 Budget Speech, announced the intention to shift the tax burden of buybacks to shareholders, similar to the taxation of dividends. The rationale is as follows:
- Previously, companies paid Dividend Distribution Tax (‘DDT’) on declared dividends, which were then tax-exempt for shareholders. In contrast, shareholders were taxed on amounts received from buybacks, rather than the companies. Section 115QA was introduced to prevent companies from using buybacks to avoid DDT.
- However, the Finance Act of 2020 subjected dividends declared after April 1, 2020, to shareholder taxation, while income distributed on buybacks remained tax-exempt for shareholders, with the tax burden borne by the company.
- The proposed amendments align the tax treatment of buybacks with that of dividends, eliminating the advantage of choosing buybacks over dividends.
Proposed Amendments in Budget 2024 and their implications
To restructure the taxation of buybacks, several amendments have been proposed in the Finance Bill 2024. Here’s a breakdown and their implications:
a. In the hands of the Company
Under the proposed amendment, the burden of tax and compliance related to share buybacks will no longer fall on the company, aligning it with the dividend regime.
The company will still be required to withhold taxes on buyback payments at a rate of 10% under section [194](javascript:void(0);) of the Act, if aggregate payments exceed INR 5,000 in a year.
b. In the hands of Shareholders
Receipt of Buyback
The sum paid by a domestic company for purchasing its own shares will be treated as dividend income for the shareholders. No deductions for expenses will be allowed, making the gross receipts fully taxable.
Similar to dividends, income from the buyback will no longer be tax-exempt, with shareholders required to pay taxes at their applicable slab rates.
Treatment of Capital Loss
When a company buys back its shares, shareholders will incur a capital loss, with the amount received from the buyback considered as NIL for this calculation. This loss can be set off against capital gains or carried forward, necessitating careful analysis for non-resident shareholders under Double Tax Avoidance Agreements.
c. Illustration
Consider the following example:
| Sr. No | Particulars | Number of Shares | Price per share (in INR) | Amount (in INR) |
| A | Initial Purchase | 10 | 1,000 | 10,000 |
| B | Buyback of shares by the Company | 4 | 1,200 | 4,800 |
| C | Income taxable as Dividends | 4 | 1,200 | 4,800 |
| D. | Capital Loss on such Buyback | 4 | 1,000 | (4,000) |
In this case, the shareholder will be liable to pay taxes on the buyback receipts of INR 4,800/- as dividend income and can set off or carry forward a capital loss of INR 4,000/- for up to 8 years.
d. Effective Date
The proposed amendments are set to be effective from October 1, 2024, applying to any share buybacks occurring on or after this date.
In summary, these proposed amendments aim to align the taxation of dividends and buyback proceeds, providing clarity and consistency in the treatment of buyback transactions under the Income Tax Act, simplifying the tax framework.