Widening and Deepening of Tax Base and Anti-Avoidance: Key Amendments
Tax on Distributed Income of Domestic Company for Buy-Back of Shares
The Finance Act of 2013 introduced special provisions for taxing distributed income of domestic companies from buy-back of shares, similar to the then-existing dividend distribution tax (DDT) regime. Before the Finance Act, 2020, companies were required to pay DDT on distributed profits, in addition to income tax on their total income. The Finance Act, 2020 abolished DDT.
Recent references have suggested that buy-back payouts should be taxed similarly to dividends, aligning the treatment of both methods used by companies to distribute accumulated reserves. Shareholders tendering their shares in a buy-back effectively extinguish their rights to those shares. Thus, the cost of acquisition of such shares must be accounted for.
Proposed Changes
Effective from October 1, 2024, the Finance Bill (No.2) of 2024 proposes the following changes:
- Tax Treatment as Dividend:
- Payments made by domestic companies for purchasing their own shares will be treated as dividends for shareholders.
- This income will be taxed at applicable rates as dividend income.
- No deductions for expenses will be allowed against this dividend income.
- The cost of acquisition of shares bought back will result in a capital loss for the shareholder. This loss can be set off against future capital gains.
- Capital Loss Computation:
- For the purposes of computing capital loss, the consideration of shares under buy-back will be deemed as nil.
- Capital loss on buy-back will be calculated as the value of consideration (nil) minus the cost of acquisition.
- Shareholders can carry forward this capital loss to offset it against future capital gains.
Example Calculation:
- 100 shares bought in 2020 at ₹40 per share (Total cost: ₹4000).
- 20 shares bought back in 2024 at ₹60 per share.
- Income taxable as deemed dividend: ₹1200.
- Capital loss on buy-back: ₹800 (₹40 * 20 shares).
- 50 shares sold in 2025 at ₹70 per share.
- Capital gain: ₹1500 (₹3500 – ₹2000).
- Chargeable capital gain after set-off: ₹700.
Key Takeaways from the Finance (No.2) Bill, 2024
The Finance (No.2) Bill, 2024 introduces several amendments, shifting the tax burden on buy-back of shares from companies to shareholders:
Section 2(22)(f): Payments by companies for share buy-backs will be taxable as dividends from October 1, 2024.
Section 2(22)(f) has been inserted w.e.f. 01.10.2024 to state that 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 is taxable as dividend. The important aspect is “any payment“. Sub-clause (iv) in the long line is omitted by the Finance (No.2) Bill, 2024 and it is actually incorporated as sub-clause (f) of section 2(22).
Omission of Section 10(34): Exemptions on income from share buy-backs will be removed.
The Finance (No.2) Bill, 2024 proposes to omit section 10(34) which provided exemption in respect of any income arising to an assessee, being a shareholder, on account of buy-back of shares is exempt. The key expression is “any income”.
Amendments to Section 46A: Consideration from buy-backs will be deemed nil, impacting capital loss computations.
The Finance (No..2) Bill, 2024 proposes to insert a proviso w.e.f. 01.10.2024 to provide that where a shareholder receives any consideration of the nature referred to in sub-clause (f) of section 2(22) from any company, in respect of any buy-back of shares, on or after 01.10.2024, then for the purposes of section 46A, the value of consideration received by the shareholder shall be deemed to be “nil’.
Previously, section 46A was not operative because of section 10(34) which provided blanket exemption from tax.
Proviso to Section 115QA: This section will not apply to buy-backs occurring on or after October 1, 2024.
The Finance (No.2) Bill, 2024 proposes to insert a further proviso to section 115QA whereby it would not apply in respect of any buy-back of shares that takes place on or after 01.10.2024.
Previously, the companies were paying tax on buy-back of shares because of section 115QA and correspondingly the shareholders enjoyed exemption because of section 10(34).
These changes reflect a strategic move to widen the tax base and enhance anti-avoidance measures, ensuring a more robust and equitable tax system.
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