Taxation of Buy Back of Shares
Query 1) Wheher Buy Back of shares is exempt or taxable?
2) If there is any loss in buy back of shares can it be set off?
3) What is the Logic behind section 10(34A)
When a company decides to buy back its own shares from a shareholder, it is considered as ‘transfer’ and the income i.e., the difference between the cost of acquisition of shares and the purchase price paid by the company, will be considered as capital gain and is charged to tax accordingly.
In case of Unlisted Shares
In case shares are unlisted then the capital gain becomes exempted from any sort of taxes as per provisions under Section 10(34A) in the hands of the shareholders. But the company who is buying those shares shall be liable to pay taxes at the rate of 20% on the said distributed income from that purchase
In case of Listed Shares.
However in case of shares which are listed on the recognized stock exchange, when a company offers to buy back its own shares from the shareholder, then the difference between cost of acquisition of those shares and the value of consideration to be received by the holder of those securities, is considered to be the capital gain in the hands of the shareholder for the year in which those shares are transferred to the company.
a) Expenditure in connection with transfer
b) Cost of Acquisition/Indexed Cost of Acquisition
|Short-term/Long-term Capital Gains||xxx|
Since Buy Back of share is exempt u/s 10(34A), any loss arising from it cannot be set off against any other income.
Section 10(34A) is implemented so that any amount of distributed income by the company on buy back of company shall be charged to tax at the rate of 20% on the distributed income u/s 115QA.
115QA reads as under.:
Notwithstanding anything contained in any other provision of this Act, 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 (not being shares listed on a recognised stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.