BUY BACK OF SHARE
Taxability on buyback of share
Shares can be returned to company under buy back agreement at Fair Market value and book value or face value of Shares should not be adopted. Under the provisions of section 56(2)(vii)/(viia) of the Income Tax Act, 1961 (the Act) if the shares of a closely held company are transferred to an individual / Hindu Undivided Family (HUF) / partnership firm / company (being a closely held company) for either nil or inadequate consideration, the difference between the fair market value (FMV) of such shares and the amount of sale consideration is taxed as "Income from other sources" in the hands of the recipient of shares. Amended Section 56 will be applicable for Repurchase and buyback of shares by private companies and there may be tax liability the on the difference between the fair market values and the buyback price if the Company re-purchasing its own shares.
TAX TREATMENT IN CASE OF BUYBACK OF SHARES:
Any sum paid out of accumulated profit to the shareholders of the company is treated as dividend under section 22(a) of the Indian Income Tax Act, 1961. However if the payment made 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 will not be treated as dividend hence Dividend Distribution Tax (DDT) under Section 115-O will not be applicable in this case.
As per Section 46A of the Income Tax Act, 1961 if a shareholder or a holder of other specified securities receives any consideration from any Company for purchase of its own shares or specified securities held by such shareholders then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholders or the holders of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholders or the holders of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company. To conclude, the company is not liable to pay any DDT but as per Income Tax Act, 1961, shareholders who are receiving consideration are liable to pay Capital Gain Tax.
VALUATION OF BUY-BACK PRICE
The Central Board of Direct Taxes ( CBDT) had prescribed Rules 11U and 11UA under the Income Tax Rules, 1962 (the Rules) for arriving a fair market value.
Rule 11UA prescribes the following basic formula to arrive at the FMV of equity shares of an unlisted closely held company:
FMV = (book value of assets less book value of liabilities) × paid-up value of equity shares to be issued
Paid up equity share capital as it is appearing in books
For the purpose of above formula the book value of assets would include only those items that actually represent the value of any asset.
Any amount shown as the unamortized amount of any deferred expenditure would not be included while calculating the book value of asset.
Similarly, for the purpose of above formula, the book value of liabilities would exclude the amount of provision for taxation which is in excess of tax payable on book profits (other than any tax paid as deduction/collection or advance tax as reduced by claim of refund under the Act);
There is no Stamp Duty is payable in case of buy back of shares and transfer of shares in case of company.
Website : www.amitarun.com