The Indian Finance Minister presented the annual budget for
2013/2014 on 28 February 2013. A new proposed chapter in the Income
Tax Act "Chapter XII-DA Special Provisions Relating to Tax on
Distributed Income of Domestic Company for Buy-Back of Shares"
to impose tax under section 115QA in hands of company has been
introduced. This chapter states that "any amount of
"distributed income" by the company on
"buy-back" of shares (not being shares listed on a
recognised stock exchange) from a shareholder shall be charged to
tax and such company shall be liable to pay additional income-tax
at the rate of twenty per cent on the distributed income." The
term "distributed income" is calculated as the difference
between the amount paid as consideration for buying back the
unlisted shares and the consideration received by the company when
issuing these shares. This tax would be imposed on the company
which is buying back its shares and buyback receipts which are
taxed in the hands of the company would not be subject to tax at
the shareholder level. The amendment will be effective from 1st
Under the existing provision "Transfer of shares" in
an Indian company by a shareholder (which includes buy-back of
shares under section 77A of the Companies Act, 1956) is subject to
tax under the head "capital gains". The consideration
received by a shareholder on buy back of shares by the company is
not treated as dividend but is taxable as capital gains under
section 46A. One of the key implications of the buy-back shares tax
is that by taxing the buyback shares in the hands of the buying
company this neutralizes the benefit of capital gains exemption
which is available under various India double tax treaties,
including those with Mauritius and Singapore. In such double tax
treaties, shareholders are permitted to claim capital gains
exemption on buyback shares of an Indian company, yet this tax will
significantly impact the benefits availed by the double tax
The tax is required to be paid to the government within 14 days
from the date when payment of any consideration to the shareholders
is made. If the tax is not deposited in time, by the principal
officer of the company a liability to pay interest at 1% will arise
for every month, or part of the moth for the period commencing
immediately after the expiry of the 14th day from the
payment of any consideration to the shareholders.
If you are interested in details of the Proposed Tax on Buy Back
of Unlisted Shares please contact Charles Savva at +357 22 516 671,
or by email email@example.com.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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