Income Tax--Finance Bill, 2026
Print lost in the pages -- Finance Bill, 2026 -- Part-1 [Buyback taxation]
Srivatsan Ranganathan
In a series of write ups the author has brought out the fine prints of the provisions of the Finance Bill, 2026. In this first part he has dealt the issue of buy back taxation.
1. The Past
Buy back has had a chequered history in the Income tax law. Originally Section 46A taxed consideration arising out of a buy back as capital gains. Subsequently section 115QA was carved out in the statute wherein buy back was taxable in the hands of the Company and the buy back and was exempt in the hands of the share holders under section 10(34A). The tax rate prescribed under section 115QA was 23.296%. This buy back would cover only buy backs under section 68 of the Companies Act, 2013. Thus, buy back by foreign companies fell in the scope of section 46A under capital gains provisions read with the respective DTAA provisions.
Buyback by listed companies happened either via the open market route or via the tendered route. For unlisted or private limited companies; buy back was possible through proportionate buying via an offer to all the shareholders. Selective shareholders could refuse to be part of the buy back thus making the buy back a more parochial or limited buy back as viable alternative to return back cash to select shareholders using the buy back route. Even such buy backs were taxed under section 115QA @ 23.296%.
2. The Paradox
This 115QA route was misused by many promoters both in the listed and unlisted space wherein they could make the Company pay an effective tax rate of 23.296% vis a vis the buy back consideration /capital gains being taxed in their hands @ a higher rate or at the maximum marginal rate possibly due to they being high net worth individuals.
Under Companies Act, 2013 buy back upto 10% of the paid up share capital and free reserves was possible only with a board resolution and beyond 10% until 25% of the paidup share capital and free reserves was done through an AGM/EGM shareholders approval as per section 68 of the Companies Act, 2013.