Sorry FM madam, with great respect and regards, author differ and request you to withdraw proposal of deemed dividend.Just amendment to S. 10(34A) and 115QA , as proposed will be sufficient to make shareholders liable to pay tax on any profit or gains, if any, in case of bought back of shares. Deeming dividend is patently wrong on all principals.

[DEVKUMAR KOTHARI]

Sorry FM madam, with great respect and regards, author differ and request you to withdraw proposal of deemed dividend.

Just amendment to S. 10(34A) and 115QA , as proposed will be  sufficient  to make shareholders liable to pay tax on any profit or gains, if any,  in case of  bought back  of shares. Deeming dividend is patently wrong on all principals.

Recalling history of tax provisions relating to shares bought back by Issuer Company:

Earlier shareholder was liable to pay tax arising on any profit or gain on any payment received by him on shares bought back by company.

Profit or gains were computed as per normal provisions applicable in facts and circumstances of case of assessee and his holding. These could fall under category of business profit or long-term capital gains or short-term capital gains.

If these did not fall under  any of these category in some exceptional circumstances, then any excess over cost could be assessed as income from other sources.

However, in any situation , cost of acquisition, was allowed to be deducted with benefit of cost inflation index and fair market value as on cut of date, if applicable, in case of long-term holding of shares.

On introduction of tax in hands of company vide S.115QA , any profit distributed on buy back of shares by company was taxed in hands of company and correspondingly amount received by shareholder was exempt u.s. 10 (34A).

There could be situations in which there was no distributed profit computed, as per provisions hence, company was not liable to pay tax even after buying back of shares.

 In that situation, in opinion of author, shareholder was required to compute his profit or gains and pay tax or in case of loss could claim loss.

Even in situations , where company had paid tax on distributed profits, in some situations shareholders might have suffered loss , because he had purchased shares after issue of shares  by company and at higher price. In that situation shareholder could claim loss suffered due to buy back of shares, because there is transfer of shares and consideration received is lower than the cost price or cost increased by cost inflation index.

In any situations reality that shareholder has incurred cost and that there is transfer of valuable asset having cost was recognized and accordingly computation could be made in hands of company and / or shareholder.

However, as per budget proposal, money received from company will be considered as dividend and cost  of shares surrendered in buy back  will be treated as capital loss.

Proposal for deemed dividend and related provisions:

Vide clause 3.

 In section 2 of the Income-tax Act,–– (a) in clause (22), with effect from the 1st day of October, 2024,–– (I) after sub-clause (e) and before the long line, the following sub-clause shall be inserted, namely:––

“(f) any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013;”;       ( 18 of 2013).

   (II) in the long line, clause (iv) shall be omitted;

Vide clause 4

Amendment of S.10:

(d) in clause (34A), the following proviso shall be inserted with effect from the 1st day of October, 2024, namely:–– “Provided that this clause shall not apply with respect to any buy back of shares by a company on or after the 1st day of October, 2024.”;

Vide clause 39

Amendment of S. 115QA

39. In section 115QA of the Income-tax Act, in sub-section (1), after the proviso and before the Explanation, the following proviso shall be inserted with effect from the 1st day of October, 2024, namely:–– “Provided further that the provisions of this sub-section shall not apply in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024.”.

From budget speech of honorable FM

Deepening the tax base

157. I have a couple of proposals for deepening the tax base. First, Security Transactions Tax on futures and options of securities is proposed to be increased to 0.02 per cent and 0.1 per cent respectively.

Second, for reasons of equity, I propose to tax income received on buy back of shares in the hands of the recipient.

D.1 Buy-back of shares: 

It is proposed that the income from buy-back of shares by companies be chargeable in the hands of recipient investor as dividend, instead of the current regime of additional income-tax in the hands of the company. Further, the cost of such shares shall be treated as a capital loss to the investor.

Sorry honorable FM madam, author differ:

With great regards, author feel sorry to convey his differences about above aspects spelled out by honorable FM for the following reasons:

There will be no deepening the tax base, the shareholders are already in tax base in different manners due to provisions relating to PAN, KYC, tax and TDS on dividend, details to be furnished by shareholder, company and depositories etc.

 Whether, company or shareholders pay tax, it will not make change. There will be no widening of tax base.

Madam says that for reason of equity she has proposed tax in hands of shareholders.

There would be equity, if tax in hands of shareholders is imposed on income, profit or gains, if any.

But unfortunately  and wrongly madam has proposed tax on return of capital received, that too on entire sum received.

Furthermore, madam has also ordered that “the cost of such shares shall be treated as a capital loss to the investor”.

Therefore, very humbly the author request honorable madam to make provision in correct perspective.

For that purpose,  only amendment to  S.115QA ,  and 10 (34A) as proposed will be sufficient.

Taxability in hands of shareholders will be consequential. However,  a  clarification can be made that the shareholder shall be liable to tax on profit or gains in his hand as may be applicable.