Different tax implications to share buyback :

Different tax implications to share buyback :
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There are times when there is a buyback of the shares by a company from its shareholders. When this is undertaken, it could give rise to a question mark on whether there is some tax that would have to be paid on the transaction. The main thing here is the manner in which the buyback is carried out. It will determine the tax liability in the whole process.

Here is a look at a couple of ways in which this is done and the tax implications of the move.

Buyback through submission
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One way of buyback could come through the route of contacting the shareholders and buying the shares back from them directly. When this process is undertaken then there is a distinct way in which things are done.

This happens due to shares being transferred to the demat account of the buyer. Hence, there is a separate schedule that is drawn up for this purpose.

The buyer which in this case is the company itself; would ensure that they contact the investors directly and then are provided the required information with respect to the action that they need to take. For this purpose they would need to fill in a specific form and then transfer the shares to the company.

There are two ways in which this can be done. One involves transfer to the demat account directly and the other would involve using a transfer form if the shares are present in physical form. There is a specific price that is determined for the purpose of the buyback.

This would be the amount that is paid to the shareholder. When this direct buyback route is taken, then the investor does not get the benefit of the zero rate of tax on long term capital gains. The conditions related to the application of these rates are not fulfilled.

The investor does not transact on the stock exchange and there is no securities transaction tax paid. So this will not allow for the application of the zero tax rate.

The tax would be 20 percent with the benefit of indexation or 10 percent without the benefit of indexation.

Buyback through market
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The other way in which the company can buyback shares is through the open market. Here there is a limit or ceiling price that is suggested by the company wherein it would buy the shares at a price that is lower than this.

The company then has the discretion to buy the shares from the market as and when it feels is appropriate.

This results in a situation where the investor might actually be selling shares to the company as a buyback but they would not know about the details. This is because they are undertaking a normal sale on the stock exchange and have no idea who the buyer is.

This is important because the price that the investor gets for the sale of the shares is the one that is prevailing in the market. It could be far less than the ceiling that has been suggested.

A benefit of this route is that the buyer will be able to get the advantage of the zero rate of tax on long term capital gains because the necessary conditions for this purpose are satisfied. This happens as the transaction is on the stock exchange and securities transaction tax is paid on this.

This will ensure that there is no tax liability if the gains have arisen after the shares have been held for a period of more than a year. This can result in a lot of tax savings for the investor especially when the gains are large.

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