Section 115QA of the Income TaxAct, 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!
What is Section 115 QA of Income Tax Act?
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:
When the stock exchange lists a company
A company has to announce that it is buying back shares
Further, the public announcement needs to be made under the Securities and Exchange Board of India Regulations provisions.
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.
What is the Reason for Buying Back Shares?
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:
Increase Promoter Share hold: Companies often repurchase their shares from existing shareholders when they notice that promoters are increasing their shareholding in the company.
Compact Ownership: If an individual or company owners have a substantial hold on company shares, they have widespread ownership. Moreover, it reduces the cost of capital.
Attractive Financials: The reduced number of shares increases the earning of each share after the buyback. Hence, the said company’s shares become profitable in the eyes of the investors.
Correction of Share Prices: Companies can buy back shares if the market price of their shares is undervalued. This way, the company can increase the market value of the shares.
What is the Taxability of Buyback of Shares under Section 115QA?
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.
When are the Provisions of Section 115QA Not Applicable?
Provision on Section 115 QA will not be applicable for the following cases:
When the listed company has announced buyback of its shares
Further, the announcement is made per the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018
What are the Implications of Buyback of Shares under Section 115QA Of Income Tax?
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.
Example to Illustrate Buyback of Shares under Section 115QA of Income Tax
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 actis not applicable to investors for both listed and non-listed companies.
FAQs on Section 115 QA of the income Tax Act
Q1. Can I claim tax credit on tax paid for buyback shares?
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.
Q2. Why did the Government of India introduce buyback?
Many companies tried dodging tax payments. This is why GoI introduced this tax.
Q3. Which section in the income tax act exempts dividends?
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.
Q4. Can I sell my buyback shares after the record date?
Yes, if you have held your shares till record date then you are eligible to sell buyback shares.
Q5. Does buyback affect share price?
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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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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