11/24/21, 1:54 PM BUY-BACK OF SHARES - GRANDMARK & ASSOCIATES

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October 24, 2020

By Sushil Sharma, FCA
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BUY-BACK OF SHARES

How to withdraw hard-earned tax-paid money from a Company has always been a challenge. Before any
shareholders and promoters in the form Dividends or Buy back, the company already suffers a tax of 30%
Cess. The effective rate of Dividend Distribution Tax (which has been abolished from 01-04-2020) was 2
abolition of DDT, the dividend is taxable in the hand of recipient at a rate which may vary between 34.32
42.744%, depending upon applicable slab rate and applicable surcharge. Therefore, by the time money re
shareholders, the Company and the recipient suffer a Tax incidence up to 62%, which discourages compa
of the system.

Since, in the case of buyback of shares, it is the company which pays taxes @ 23.296% u/s 115QA, this is s
option. Buy-back of shares is also preferred for improving certain financial ratios of the company, improv
companies, providing tax-effective means of rewarding shareholders, providing an exit to the shareholde
stake.

 Income Tax Sections Triggered:

Section 56(2)(x) Person receiving any specified property (which includes

shares and securities without consideration or for a
consideration which is less than its fair market value.
Section 50CA Consideration received on transfer of unquoted shares, which
is less than its fair market value
Section 115QA Levy of tax on account of buy-back of shares
Rule-40BB Amount received by the company in respect of issue of share
Rule-11UAA Determination of Fair Market Value for share other than
quoted share
 

Section 10(34A) Taxability in the hands of Shareholder

Section 115JB MAT on buy back consideration of Company shareholders
Section 2(22)(e) Deemed Dividend
 

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Applicable sections of Companies Act, 2013

Section 68 – Power of company to purchase its own securities

Section 69 – Transfer of certain sums to capital redemption reserve account
Section 70 – Prohibition for buy-back in certain circumstances
Rule 17 of the Companies (Share Capital and Debenture)
HOMERules, 2014 stating
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to be complied
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companies and unlisted public companies for buy-back of their securities

Income Tax provisions

According to The Finance Act, 2020, Dividend Distribution Tax is no longer applicable to dividends decla
on or after 1st April, 2020 (AY 2021-22 onwards). Further, Section 10(34) has also been deleted, which p
to income, in the nature of dividend referred to in Section 115-O, i.e. dividends on which DDT had been p
levying tax, at the rate of 10%, on dividend income in excess of INR 10 lakhs is also no longer applicable. T
received, on or after 1st April, 2020, will be taxed in the hands of the shareholders, at the rates applicabl
amendments are beneficial only to small tax payers. Those individuals having taxable Income above Rs. 5
shareholders, the effective tax rate on dividend would go up to 34.32% to 42.744%.

According to Section 115QA, read with Section 10(34A), incidence of tax on buy back of shares by the co
company level and thereafter no tax is required to be paid by the shareholder towards Capital Gains u/s
48. This also makes a case for non-applicability of 50CA.

The companies on whom provisions of Section 115JB are applicable, need not include such income for ca
exempt under Section 10.

The Finance Act, 2013, inserted Section 115QA, which provides for the levy of tax, on account of buy-ba
effective rate of 23.296% (20% + 12% SC + 4% H&EC), in case of a domestic unlisted company (which wa
listed companies as well by the Finance Act, 2019). Buy-Back Tax has to be paid by the company on the d
is nothing but the consideration paid by the company on buy back of shares, as reduced by the amount re
on issue of such shares, determined in the manner prescribed under Rule 40BB of the Income Tax Rules,
Buy Back Tax has to be paid by the company over and above the tax paid by it, if any, on its total income. T
income arising in the hands of shareholders is exempt from tax, as per Section 10(34A) of the ITA.

For the purpose of Section 115QA, ‘Buy-Back’ means purchase by the company of its own shares, in acco
provisions of Section 68 of the Companies Act, 2013.

Applicability of Section 56(2)(x)

Another important question to be considered is when a company carries out buy-back of its shares, then
of Section 56(2)(x) can be invoked on such company. If yes, then when the company does buy back of its s
consideration less than the Fair Market Value (FMV) of the shares, determined in accordance with Rule 1

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differential amount (i.e. FMV of the shares Less Consideration paid) will be taxable, in the hands of the co
56(2)(x) of the ITA.

Provision of Section 56(2)(x) can, however, be invoked only if the property (being shares in this case) sho
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the hands of recipient. In other words, for Section 56(2)(x) to be made applicable  b
on a company, buying
so bought back should become the “Property” of such company.

Section 68 of the Companies Act, 2013 sets out the provisions for Buy Back of shares by the company. A
Section 68 “Where a company buys back its own shares or other specified securities, it shall extinguish and phys
or securities so bought back within seven days of the last date of completion of the buy-back..”

Therefore, in a scheme of buy back, shares bought back are no more in existence as they are extinguished
Share Capital. Hence, when a company buys back its shares, such shares do not become “property” or ass

Therefore, provisions of Section 56(2)(x) cannot be invoked in case a company buys back its own share

Valuation of Shares for Buy-back

The value to be assigned to the shares, by the company, for the purpose of buy back, is not required to be
with Rule 11UA and 11UAA, being applicable for the purpose of Section 56 and Section 50CA respective
the FMV of the shares to be determined in accordance with Rule 11UA. However, the value so determine
than the FMV of the shares of the company, as otherwise, the differential amount can be charged to tax a
2(22)(e).

PROVISIONS UNDER COMPANIES ACT, 2013

Provisions governing the buy back under Companies Act, 2013 are contained in Section 68 to Section 70
Companies (Share Capital and Debenture) Rules, 2014.

Section 68 has an overriding effect on the other provisions contained in the Companies Act, 2013.  Sectio
pre-requisites for a buy-back to take place. Such pre-requisites, as applicable on unlisted companies are

1. Buy-back is to be authorized by Articles of Association.

2. Special resolution is passed by the company authorizing buy-back. However, if the buy-back is 10% o
equity capital and free reserves (including securities premium), board resolution is the sufficient requ
3. Buy back can be done out of free reserves, securities premium account, proceeds of issue of any shar
securities.
4. Debt-equity ratio post buy-back not to exceed 2:1
5. All the shares or other specified securities for buy-back are fully paid up.
6. There cannot be more than one such offer of buy-back in a period of 365 days.

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Other provisions to be complied with by the company are as under:-

1. The notice of the meeting at which the Special Resolution is proposed to be passed shall be accompan
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statement stating particulars like necessity for buy back, class of shares, etc.
2. Every buy-back should be completed within 12 months from the date of passing Special Resolution o

After completion of buy-back the company cannot make any further issue of same kind of shares with
months. (Exceptions: Bonus issue, discharge of subsisting obligations, conversion of preference shares or

1. Further, Declaration of Solvency by the Board of Directors of the Company to be filed in Form No. SH
affidavit signed by at least 2 Directors, one of whom should be a Managing Director, if any, to the effe
capable of meeting its liabilities and will not be rendered insolvent within one year from the date of d
the Board.
2. Company shall extinguish and physically destroy the shares or securities so bought back within seven
completion of buy back.
3. Company shall maintain a register (in Form No. SH.10) of the shares bought, the consideration paid, t
of shares, the date of extinguishing and physically destroying the shares.

After completion of buy back, a return to be filed (in Form No. SH.11) with the ROC containing particu
meeting, objective of buy back, class and no. of shares bought back, method adopted, buy-back price and
same, etc.
Certificate in Form No. SH.15 shall be annexed with Form No. SH.11 signed by Two directors certifyin
securities has been made in compliance with the provisions of the Act and the rules made there under.

1. Company shall file Form No. SH.8 with the ROC before buy back.
2. Letter of offer to be dispatched to the shareholders immediately after filing the same with ROC but n
from its filing with the ROC.
3. Offer for buy back shall remain open for a period of 15-30 days.

Company shall immediately after the date of closure of the offer, open a separate bank account and
for discharging the consideration.
Company cannot withdraw the offer once it has been announced.
Company cannot utilize proceeds of borrowings from banks or financial institutions or from an earlie
shares.

1. A sum equal to the nominal value of the shares bought back to be transferred to the capital redempti
details of such transfer shall be disclosed in the balance sheet.

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Sub-Section (5) of Section 68 provides that the Buy Back may be from the existing shareholders or se
proportionate basis.

SECTION 70 – PROHIBITION FOR BUY-BACK OF SHARES

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As per Section 70 of the Companies Act, 2013 a company shall not buy-back its shares or other specified

1. Through any subsidiary company, including its own subsidiary company.

2. Through any investment company or group of investment companies.

If default subsists in repayment of public deposits accepted or interest payable thereon, redemption o
preference shares or payment of dividend to any shareholder or repayment of any term loan or interest
financial institution or bank; The prohibition is lifted if the default has been remedied and a period of 3 ye
such default ceased to exist.

13. Further, no company shall, directly or indirectly, buy back own shares in case such company has not co
provisions of Sections 92 (Filing of Annual Return), Section 123 (Declaration of Dividend), Section 12
Failure to distribute dividend) and Section 129 (Preparation of Financial Statements) of the Compani

BUY BACK FROM EXISTING SHAREHOLDERS ON PROPORTIONATE BASIS

According to Section 68 (5) buy-back “may” be undertaken by the company from its existing shareholder
basis. It implies that the offer for buy back has to be given by the company to its existing shareholders an
has to be in proportion to the existing holding of the shareholders. However, as per Section 68(2), a comp
more than 25% of its Paid-up Equity Share Capital and Free reserves.

TAXABILITY IN THE HANDS NON-RESIDENT SHAREHOLDERS

According to Section 195, “any person” making payment to a non-resident is required to withhold tax fro
credited to a non-resident which is chargeable to tax in India. Tax is required to be withheld at the time o
whichever is earlier. This implies that tax under Section 195 is only required in case the payment made to
in India

Since the income received by the shareholder in case of buy back by an unlisted company is exempt as pe
company buying back its shares from a non-resident shareholder is not required to deduct any tax at sou

Thank you

Sushil Kumar Sharma

Senior Partner at G R A N D M A R K & ASSOCIATES

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