I respectfully urge the Ministry to reconsider the current tax treatment of share buyback proceeds under Section 2(22)(f) of the Income-tax Act, effective from October 1, 2024, for resident individual shareholders.
1. Taxing Capital Receipt as Revenue Income
The fundamental objection is the classification of the buyback consideration as a 'deemed dividend' taxed at the ordinary slab rates. A buyback is fundamentally a transfer of a capital asset (shares) and a part of the consideration represents the return of the shareholder's capital (the original Cost of Acquisition).
• Plea: The consideration received should be bifurcated. The portion equivalent to the original Cost of Acquisition must be exempt from tax in the hands of the shareholder, as it is a return of capital already funded by post-tax income.
2. Disproportionately High and Unfair Tax Burden
Taxing the gross consideration at high slab rates (up to 39%) creates a tax outcome that is significantly harsher than the treatment for an open market sale, which is taxed as a Capital Gain at lower rates (e.g., LTCG at 10% or 12.5%). This discrepancy defeats the purpose of providing an alternate exit route for investors.
• Plea: The entire transaction should be removed from the ambit of Section 2(22)(f) and restored to the Capital Gains framework (Section 46A), where the shareholder is taxed only on the actual long-term or short-term gain (Buyback Price - Cost of Acquisition) at the applicable capital gains rates.
3. Inadequate Relief through Capital Loss Provision
While the law permits the Cost of Acquisition to be treated as a Capital Loss, this is an ineffective and insufficient relief for the immediate and high tax liability on the gross buyback amount.
• The utility of the Capital Loss is delayed (only available for future gains) and restricted (LTCL can only offset LTCG). An investor may not have sufficient or any future capital gains to fully utilise this loss within the carry-forward period of eight years, leading to a permanent loss of the deduction benefit.
Request for Reconsideration:
To ensure a fair and equitable tax regime, the government is urged to reinstate the Capital Gains treatment for individual resident shareholders on buyback proceeds, thereby taxing only the gain at the applicable capital gains rates. Alternatively, if the deemed dividend classification is retained, the shareholder must be allowed to deduct the Cost of Acquisition from the gross buyback price to arrive at the net amount taxable as a dividend.