Listed companies will pay tax on buy-back of shares- Finance Bill 2019
A company generally buys-back its shares if they are in excess or market price of such shares is lower than their real worth. When a company buys-back shares from the shareholders, the capital gains arising therefrom is taxable in the hands of the shareholders except in case of unlisted company.
In case of buy-back of shares by the unlisted companies, Section 115QA provides for the levy of additional Income-tax on the companies at the rate of 20% of the distributed income. Consequently, the capital gain arising in the hands of the shareholders aren’t charged to tax as tax is levied at the level of the company.
Section 115QA was introduced as an anti-abuse provision to check the practice of unlisted companies resorting to buy-back of shares instead of payment of dividends. This practice was noted amongst unlisted companies as tax rate for capitals gains was lower than the rate of Dividend Distribution Tax (DDT).
The instances of similar tax arbitrage have now come to notice in case of listed companies as well, whereby the listed companies are also indulging in such practice of resorting to buy-back of shares, instead of payment of dividends. Hence, in order to curb such tax avoidance practice adopted by the listed companies, the Government has extended the existing anti abuse provision of Section 115QA in case of listed company as well. Thus, any buy back of shares from a shareholder by a listed com-pany shall also be covered by the provision of Section 115QA. Consequently, Section 10(34A) has also been amended to exempt the capital gains arising in the hands of shareholders on account of buy-back of shares on which additional income-tax has been paid by the company.