Section 115QA of the Income Tax Act, 1961 regulates taxability on buying back shares. Further, income tax is levied on these shares. Buy back shares constitute repurchase of existing company shares. Moreover, these companies buy back their shares at a higher value than market value.
If you want to know more on this topic, then read on!
Section 115 QA of the Income Tax Act states that company owners will have to pay a 20% surcharge and 12% if they buy back their shares. Moreover, the Government of India issued this tax to curb companies who tried evading tax payments.
Section 115 QA will not be applicable on the following:
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Earlier, after buying back shares, the amount was distributed among shareholders. Shareholders had to pay the taxes in the form of capital gains. However, the company did not have to pay taxes in any form. Eventually, it became a gateway for companies to avoid paying taxes, especially unlisted ones.
Additionally, Section 115 QA applied only to unlisted companies, but the Union Budget of 2019 made it applicable to listed companies as well. Further, this amendment is effective on all repurchased shares after July 5 2019.
A company raises capital by distributing its shares among shareholders. Therefore, they contradict their actions when they buy those shares back. Some reasons to repurchase those shares include:
Section 115 QA of Income Tax Act, 1961 states that both listed and unlisted companies will have to pay additional income tax. Moreover, the effective rate of tax levied is 23.296% (20% + 12% SC + 4% H & EC). Besides, the company pays these taxes on distributed income of shareholders that they earn from those to buy back shares. Further, Section 115 QA tax exempts the shareholders’ income.
Furthermore, the company is required to pay taxes within a 14 days period. These 14 days are calculated from the payment date to shareholders after getting paid for buying back shares. Moreover, the IT department will consider the tax on buying back shares as the final payment.
Provision on Section 115 QA will not be applicable for the following cases:
This section balances out both buyback shares and dividend pay-out. Most companies are now showing more preferences toward dividend pay-outs.
Besides, a more significant concern for listed companies is that calculation of amount received for issuing these shares can be absurd. Additionally, another concern for listed companies is that they are tradable. Hence, shareholders will incur capital gains on the differential price.
Further, the Government abolished the DDT on dividends during the 2020 Budget. Therefore, according to this announcement, companies did not have to pay taxes on dividends. The Government of India will impose taxes on individual shareholders now.
The following example will help in understanding the effect of Section 115 QA of Income Tax Act:
“ABC” is a company listed on the stock exchange. The company bought back 2000 of its shares in May 2020. The market price of the shares is Rs. 500, and its issue price is Rs. 50. Now the company will have to pay 20% of distributed earnings which will be Rs. 450. This amount is deducted by subtracting the market price from the issue price.
So, the company will now have to pay Rs. 90 in taxes for each share they bought back. Further, there will be no tax liability for individual shareholders.
The above-stated information clarifies that companies do not have any income tax liabilities from the earnings gained from buying back shares. Further, companies can no longer use this method to dodge paying taxes. Therefore, Section 115 QA of income act is not applicable to investors for both listed and non-listed companies.
The tax that the company has to pay on distributed income is considered the final payment. Therefore, companies cannot make any further claims on the taxes paid. Further, Section 115 QA does not allow any deduction to the company or its shareholders.
Many companies tried dodging tax payments. This is why GoI introduced this tax.
Section 10(35) exempts any income from tax through dividends and mutual funds. In simple words, individuals will not have to pay taxes on income through a mutual funds scheme, etc.
Yes, if you have held your shares till record date then you are eligible to sell buyback shares.
Yes, buyback affects the share price. First, it increases the market value of shares, so companies opt to repurchase their shares.
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