BUY-BACK TAXATION FOR COMPANIES
A buy-back is repurchase of own shares by a company in order to reduce it share capital. Companies traditionally buy-back shares in two scenarios to either increase the value of the shares or to avoid other stakeholders from acquiring a controlling stake in the company.
The introduction of section 46A to provide that any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities would be taxable as capital gains subject to computation mechanism provided under section 48 of the Income Tax Act 1961.The difference between cost of acquisition and value of consideration received by the shareholder or a holder of other specified securities, shall be deemed to be capital gain arising to such shareholder or a holder of other specified securities in year in which shares or specified securities were purchased by the company.
However in case of unlisted shares by domestic company, the onus of tax liability on buy-back of shares was shifted from the shareholders to the company purchasing its own shares. The company purchasing its own unlisted shares shall be liable to pay tax on the distributed income at the rate of 20% plus applicable surcharge and cess under section 115QA of the Income Tax Act 1961.
Section 115QA of Income Tax Act 1961 defines distributed income as 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.
Section 10(34A) was introduced to the Income Tax Act 1961 to provide exemption to income arising to a shareholder on account of a buy-back of unlisted shares as referred to in section 115QA of the Income Tax Act 1961.