Demystifying Section 115QA: Tax on Share Buybacks

Understanding Share Buybacks: Companies repurchase their own shares, often to enhance EPS, address undervaluation, or signal confidence to investors. Introduction of Section 115QA: Implemented in 2013, extended to listed companies in 2019 to curb tax avoidance strategies.

Tax Provisions: Companies pay 20% tax on distributed income from buybacks, plus a 12% surcharge and cess. Shareholders are exempt from tax on gains from buybacks under Section 10(34A) of the Income Tax Act.

Illustration: Bajaj Auto's buyback program exemplifies the tax responsibilities at the company level and the tax exemption for individual shareholders.

Shift in Tax Burden: Previously, companies paid Dividend Distribution Tax (DDT), but it was abolished in 2020. Now, shareholders bear the tax burden, making buybacks more tax-efficient than dividends.