Indian Merchants’ Chamber
Amendments proposed in
Finance Bill, 2013
Buyback of Shares
S. Gayathri
Buyback of shares – the purpose, the regulations
Budget speech, 2013 – Some tax avoidance arrangements come to notice, loopholes
proposed to be plugged. Some unlisted companies avoiding dividend distribution tax by
arrangements involving buyback. A final withholding tax @ 20% proposed on profits
distributed by unlisted companies through buyback.
Buyback per se being tax avoidant
•
Avoidance noticed in some cases, anti avoidance rule applicable to all cases
•
Various objectives of buy back, universally applicable, beyond tax avoidance
-
Increase promoter holdings, enabling exit where buyers not avoidable
-
Rationalize capital structure – achieve or maintain a target structure
-
Support share value during temporary weakness maintain share price (SEBI’s new
proposals relevant)
-
Thwart take-over bid
-
Increase Earning Per Share
-
Return surplus cash to shareholders
-
Take advantage of undervaluation
•
Enabling buy back provisions consciously introduced
•
Highly regulated event under Companies Act, SEBI, Income-tax
2
Buyback of shares – the purpose, the regulations
 Re-characterizing the tax avoidance
•
A GAAR event promoted to SAAR event
•
Moved from General to Special in coverage, but specific to general in approach
Anti-avoidance measure advanced by three years
-
Effective dilution of relief sought to be given
 Measure punitive and deterrent in nature – since it was seen as an alternative to
dividend distribution, the levy should have been equated to DDT - 15%
3
Buyback of shares – gist of income- tax provisions
Per Section 115 QA –
•
Any amount of distributed income on buy-back of shares (not listed in a recognized stock
exchange) in accordance with section 77A of the Companies Act, 1956 from a shareholder
•
shall be charged additional income-tax @ 20%
•
on the consideration paid by the company on buyback of shares as reduced by the amount
which was received by the company for issue of such shares.
•
Payment to be made within 14 days of payment to the shareholder and the tax shall be the
final payment of tax on the income.
•
No credit shall be available in respect of the tax paid, no deduction allowed in respect of
the distributed income or tax thereon to the company or the shareholder
Per 115QB - interest @ 1% pm for delay in paying the tax
Per 115QC – Non payment in accordance with the provisions will make the Principal officer
or the company will be regarded as assessee in default
10(34A) - income arising to a shareholder, on account of such buy back of shares shall not be
included in his taxable income
4
Buyback of shares – gist of income- tax provisions
Earlier provisions relating to buyback not amended
Per Section 2(22)(iv) - payment by a company on purchase of its own shares from a
shareholder in accordance with the provisions of section 77A of the Companies Act, 1956
excluded from the definition of deemed dividend
Per Section 46A - Capital gains on purchase by company of its own shares/other specified
securities (as referred to in Section 77A of the Cos Act) on the difference between the cost of
acquisition and the value of consideration to arise to such shareholder/holder
In terms of section 2 (47), a buyback would continue to remain a transfer
The overall implications from a tax perspective:
A buy back in terms of section 77A is a transfer, but not taxable under ‘capital gains’
It is meant to address non- distribution of dividend, but is not a deemed dividend
The levy is referred to as withholding tax in the budget speech, but is a tax on distributed
income, according to the provisions
5
Case 1 – Various forms of acquisition and implications thereof
Shareholding pattern of X Ltd ,an
Indian unlisted company
Par value of shares Rs. 10
Issues
B Ltd
• A Ltd -Where shares are held in demat form, would
the amount received for issue of shares be Rs.10?
Rs. 30? Or average?
Original holding
was debentures
issued at Rs.20.
Converted to equity
shares at Rs. 10
A Ltd
C Ltd
Shares issued
in two tranches
At par
At Rs. 30
Purchased
shares from
third party at
Rs. 25
India
X Ltd
Shares held
as stock in
trade
D Ltd
X Ltd decides to do a buy back in accordance with
various regulations with the object of supporting share
price during a difficult period
Shares held for
3 years
Shares
held for 3
months
Z Ltd
Y Ltd
• A would be deprived of the hedge against foreign
exchange fluctuation provided in the case of capital
gains
• B Ltd - Where it is a case of conversion, would it be
Nil? Rs.10? Or Rs.20?
• C Ltd- Where shares had been purchased from a third
party, would it be Nil? Or Rs. 10? Or Rs. 25?
• D Ltd, Z Ltd - Where shares constitute stock in trade,
or it is a short term asset, are shareholders intended
beneficiaries?
• Y Ltd - Would effect of indexation be given to Y?
Should Y be deprived of this merely because the
purchaser is X Ltd as against a third party?
6
Case 1 – Various forms of acquisition and implications thereof
Shareholding pattern of X Ltd ,an
Indian unlisted company
Par value of shares Rs. 10
B Ltd
Original holding
was debentures
issued at Rs.20.
Converted to equity
shares at Rs. 10
• Is it intended that a shareholder virtually gives up the
benefit of a possible set off against capital losses it
may have?
A Ltd
C Ltd
Shares issued
in two tranches
At par
At Rs. 30
Purchased
shares from
third party at
Rs. 25
India
X Ltd
Shares held
as stock in
trade
D Ltd
X Ltd decides to do a buy back in accordance with
various regulations with the object of supporting share
price during a difficult period
Shares held for
3 years
Shares
held for 3
months
Z Ltd
Y Ltd
• Is X Ltd expected to consider and interpret such
aspects while paying its tax?
• Would X Ltd or the shareholder effectively get no
relief in respect of any expenses it may have incurred
in connection with the buy-back?
• Would Transfer Pricing provisions
distributed income in X’s hands?
alter
the
• If not in X’s hands, could Transfer Pricing
adjustments give rise to further taxable income in the
shareholder’s hands?
7
Case 2 –Investments from different jurisdictions
Shareholding pattern of X Ltd ,an
Indian unlisted company
Par value of shares Rs. 10
• P, the promoter and Y an initial investor invested in
X in 2010
A
• X distributed dividends in 2012
P
Y
30%
3000 shares
at par
70%
7000 shares
at par
India
• In terms of the shareholder agreement promoter
shareholdings to be increased to 75%.
• Y Ltd is located in a country that has a friendly
treaty with India re capital gains
X Ltd
• X Ltd decides to do a buy back in accordance with
the various regulations at the current market price
of Rs. 20 per share
8
Case 2 –Investments from different jurisdictions
Issues
Shareholding pattern of X Ltd ,an
Indian unlisted company.
Par value of shares Rs. 10
A
P
• Is this levy, which nullifies the benefit of a beneficial
treaty another instance of a treaty override
Y
30%
3000 shares
at par
• Notwithstanding a commercial purpose and
bonafides, Y ltd would now suffer a dent in its
valuations owing to a levy that is not grandfathered
70%
7000 shares
at par
India
• Would this levy deprive tax credit in the case of treaty
countries as
⁻
this is not a tax on capital gains, relevant where
capital gains is taxable in the residence and
source countries
⁻
the levy cannot be regarded as relating to
dividend distribution, so as to allow underlying
tax credit at least in some cases
X Ltd
• In a case where Y does a buyback of shares in
accordance with the rules of its country, would there
be an indirect transfer in India? If yes, would it
covered under the new regime or under section 46A?
9