Key issue in buyback of Shares

It is said that some unlisted companies avoiding dividend distribution tax by arrangements involving buyback. The basic objective is sometimes of Buyback per se being tax avoidant. Apart from tax avoidance other reasons are there which are given below.

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 in this regard is 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

Measure punitive and deterrent in nature – since it was seen as an alternative to dividend distribution, thus the levy been equated to DDT - 15%

Respective provision of Income Tax Act is below.

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
Earlier provisions relating to buyback not amended. As 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 is very crucial. 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 but is a tax on distributed income, according to the provisions