A share buyback occurs when a company repurchase its own shares from shareholders, reducing the number of shares on the market. This strategy helps the company reclaim ownership and strengthen its control. Share buybacks have traditionally been used to reward shareholders and manage surplus capital, but recent tax changes have significantly altered the landscape, especially concerning how taxes are levied on buyback transactions. Here is what the new buyback tax provisions, effective October 1, 2024, entails.
Buyback Tax Changes You Need to Know
Until September 30, 2024, companies are responsible for the tax on buyback transactions, calculated as the difference between the buyback price and the original issue price, at an effective rate of 23.296% (including surcharges and cess). In this framework, shareholders do not incur any tax on the amounts they receive, as the company bears the tax liability.
Starting October 1, 2024, the amendments in Budget 2024 stipulates that companies will no longer bear the buyback tax. Instead, the proceeds received by shareholders will be classified as deemed dividend income under Section 2(22)(f) and taxed accordingly. The applicable tax rate will vary based on the shareholder’s income slab, indicating a transaction from a fixed buyback tax rate to a potentially higher tax liability for those in higher income brackets.
Understanding Acquisition Expenses and Implied Capital Losses
A significant concern arising from the new provisions is the treatment of share acquisition costs. Previously, taxation was based on the difference between the buyback price and the issue price, allowing for the acquisition cost to be factored in. However, under the new regime, shareholders will be taxed on the full amount received from the buyback, with no allowance for the acquisition cost. Instead, this cost will be recognized as a deemed capital loss, which can be offset against capital gains or carried forward, depending on whether the loss is classified as short-term or long-term based on the holding period of the shares.
TDS Guidelines
Furthermore, companies conducting buybacks must withhold tax at source (TDS) at a rate of 10% for resident shareholders. For non-resident shareholders, the applicable TDS rate will vary based on the relevant tax treaties currently in effect, ensuring proper taxation of cross-border transactions.
The Buyback Amendment Illustrated
Before Amendment (Until September 30, 2024):
Buyback Price: ₹1,000
Issue Price: ₹600
Difference (Taxable for the Company): ₹400
Effective Tax Rate for the Company: 23.296%
Tax Paid by the Company: ₹93.18
Net Amount to Shareholder (Tax-Exempt): ₹1,000
After Amendment (Effective October 1, 2024):
Buyback Price: ₹1,000
Total Amount (Taxable for Shareholder): ₹1,000
Tax Rate (Based on Shareholder’s Slab): Assume 30%
Tax Paid by Shareholder: ₹300
Net Amount to Shareholder: ₹700
Acquisition Cost Deemed as Capital Loss (Set Off or Carried Forward): ₹600
The recent amendments to the buyback taxation provisions mark a substantial change in the tax landscape for these transactions. By reallocating the tax liability from companies to shareholders, the government seeks to promote greater tax equity and align the taxation of buyback earnings with that of dividend income. Nonetheless, this shift may result in increased tax obligations for shareholders, especially those in higher income brackets, while also complicating the treatment of acquisition costs. It is crucial for both companies and investors to grasp the implications of these changes and develop strategies to effectively manage any potential tax consequences.