Taxation on transfer of shares of Non-Traded or Suspended companies & Buy Back of Shares.
In the last issue of The Tax Talk, we have discussed the tax implication in case of loss in the value of shares as a result of delisting from the stock exchange. We have discussed how taxation differs in case of taxpayers treating the income from shares investment as “Income from Business” vs. those offering it under the head “Income from Capital Gain”. Taxpayers considering the income from shares transaction as business income can more easily and conveniently get the benefit of loss due to delisting of the shares by opting to value the closing shares inventory at lower of cost or net realizable value.
However, this option & benefit is not available to the taxpayers treating the income as “Capital Gain Income” as the income/loss cannot be recognized unless and until there is a “Transfer” of shares. As a result, taxpayers offering income from share investment as business income are better placed as compared to those where it is taxable as capital gain income. However, we have discussed the modalities of claiming loss by transferring the shares at a nominal price to any other person who may be a friend, associate or relative subject to taxation under section 50CA & section 56(2)(x) of the Income Tax Act-1961.
Moving forward, let us explore few more cases of taxation in case of shares wherein, though shares are not delisted but there is non-tradability of the shares in the stock exchange or Suspension of trading by BSE/NSE/SEBI due to non-payment of Annual Listing Fee etc & Buy back of shares by the company, etc.
Sale of Shares through Off Market Transactions due to non-tradability on the stock Exchange:
There are various shares which, though listed on the stock exchange, lack tradability. In case of shares which are not tradable can be sold through off market transactions to anyone to claim the benefit of loss/diminution in the value of the investment. However, the rate at which such shares were last traded on any stock exchange is considered as the fair Market Value (FMV) of the shares and is subject to tax accordingly on the basis of such FMV. It is advisable to transact the shares at such last traded price so as to avoid the rigour of section 50CA in the hands of the seller and section 56(2)(x) in the hands of the buyer.
Sale of listed Shares wherein the trading is suspended:
The transaction of sale of shares wherein trading is suspended may not be at par with the sale of shares of delisted companies as was discussed in the last issue of The Tax Talk. However, the position in such a case is almost similar to the situation discussed above and in my view the FMV of the shares as on the last working day may be considered as the FMV of the shares. In such a case also, it is advisable to transact the shares at such last traded price so as to avoid the rigour of section 50CA & section 56(2)(x).
Taxation Buy Back of Shares:
Buyback refers to the activity wherein the Company repurchases its own shares from the existing shareholders. There are often instances wherein the quoted price of the shares on stock exchange does not represent the true value of the shares and the company resorts to the buy-back of shares. Earlier, when the company used to declare dividends, they were liable to pay Dividend Distribution Tax (DDT). To avoid tax, the unlisted companies started using the buyback route to distribute money to their shareholders rather than declaring dividends. Therefore, as an anti-tax avoidance measure, the Government introduced section 115QA under the Income Tax Act by FA-2013 for unlisted companies and later on it was applicable for the listed companies as well. Now, the specific provision for taxation provides as under:
- The amount received by the investor/shareholder would be exempt from tax as per section 10(34A) of the I-T Act, 1961.
- Section 115QA:
In case of Buy-back of shares, the company shall be liable to pay tax at a flat rate of 23.296% [Tax @20% plus surcharge @ 12% plus Health and education cess @ 4%) of distributed income.
- Mode of calculating Tax on buyback of shares:
In the case of both Listed and Unlisted Companies, the tax is levied on buyback income or distributed income which is computed as under:
“Distributed Income = Consideration paid by the Company on account of buyback less the amount which was received by the company for the issue of such shares”.
If Buyback is through the open market, in such cases the shares are traded through many hands. The company cannot make out the purchase price at which individual investors would have bought shares from the open market. So, in such cases also the tax is levied in the hands of the Company, on the difference between the buyback price and the price at which the Company issued its shares irrespective of the market price at which the buyer would have bought it.
- Due Date for payment of buyback tax:
The tax is payable within 14 days from the date of payment of any amount to the shareholders on the buy-back of shares as per section 115QA(3).