Understanding the New Taxation Mechanism

The Finance Act of 2024 introduced significant changes to the taxation of buyback transactions, shifting the tax burden from companies to shareholders. Starting October 1, 2024, buyback proceeds are treated as dividends, taxed at rates up to 39% for residents and between 5% to 15% for non-residents, depending on tax treaties.

Capital Loss and Its Implications

Shareholders can treat the original cost of shares as a capital loss, adjustable against other capital gains within the same financial year or over the next eight years. The classification of this loss as long-term or short-term depends on the holding period of the shares before the buyback.

Anomalies and Recommendations

Tax experts and industry bodies like the Bombay Chamber of Commerce and Industry (BCCI) have pointed out anomalies in this taxation mechanism. They argue that not all buybacks involve profit distribution and suggest amendments to ensure that only the income component of buyback proceeds is taxed as dividends.

Looking Ahead to Budget 2025

As discussions for Budget 2025 continue, stakeholders are advocating for a more rational approach to the taxation of buyback transactions, emphasizing the need to distinguish between capital and income components to avoid undue tax burdens on shareholders.