Beyond Logic: Buy Back of Shares and its taxation from 1st October 2024
One particular proposal of the Finance (No.2) Bill, 2024 (FB 2024) which has drawn a lot of attention is the proposal to withdraw share buy-back tax (which is levied at the rate of 23.296%) under section 115QA of the Income-tax Act, 1961 (IT Act) in respect of any buy-back of shares that takes place on or after October 01, 2024, and tax the same in the hands of the shareholders as ‘dividend’.
The memorandum to the FB 2024 mentions that “Both dividend as well as buy-back are methods for the company to distribute accumulated reserves and thus ought to be treated similarly”. However, the way the tax proposal has been made is contrary to this.
Section 2(22) of the IT Act defines the expression “dividend” which has five sub-clauses and each of it seek to deem the distribution / payment to the extent of accumulated profits of the company. The FB 2024 seeks to insert a sixth sub-clause in section 2(22) as follows:
“(f) 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”.
It is clear from the language of the proposed sub-clause (f) that it is not restricted to the amount of accumulated profits of the company on the date of share buy-back, and thus, goes contrary to the stated objective to treat the distribution of accumulated profits similarly for both dividend and share buy-back. As per section 68 of the Companies Act, 2013, a company may buy-back the shares out of (a) its free reserves, (b) the securities premium account, or (c) the proceeds of the issue of any shares or other specified securities.
In case a company utilizes the amounts referred to in (b) and (c) above for share buy-back, does it seem logical to treat the same as dividend in the hands of the shareholders? The securities premium and proceeds of issue constitute capital receipts in the hands of the company, and a distribution of the same by the company for share buy-back should not lead to change of its character from capital receipts to accumulated profits.
Further the amount given towards buy back is entirely taxable in the hands of the recipient shareholder and no deduction towards its cost of acquisition is deductible directly from the amount of dividend so made taxable. The cost of acquisition of such shares would be treated as “Capital Loss” and is allowed to be adjusted against capital gains only. It’s beyond logic as well.
Let us hope the Government takes note of this inconsistency and removes the same at the time of passing of the Finance (No.2) Bill, 2024.
