Corporate Actions – Taxation
Contributed By: Shilpa Agarwal
Email id: shilpa@simplybiz.in
Corporate actions such as issue of shares, transfer of shares, buy-back, dividend etc is governed by the provisions of the Companies Act, 2013 but there is taxation implication on various corporate actions as per Income Tax Act, 1961. Taxation also applies to the shareholder at the time of investment or sale. Thus, a proper understanding becomes important before deciding on a particular mode of issue or transfer or pay back.
In this Note, we have tried to bring out the taxation aspects on various modes of issue of shares, transfer of shares, ESOP, buy-back and dividend declaration in a tabular form for easy understanding.
| S. No. | Transaction | Taxation on company | Taxation on shareholder | ||||
| 1 | Rights issue | ||||||
| a. | Issue of Rights shares | Nil | If the shareholder subscribes only to the extent of the shares offered to him as rights issue based on his holding | Nil | |||
| If the shareholder subscribes to more than shares offered to him | FMV of the excess shares as exceeds the consideration paid by INR 50,000 will be taxed as income from other sources (Sec. 56(2)(vii)/Sec.56(2)(x) | ||||||
| b. | Sale of Rights shares | Not Applicable | Capital gains – STCG (less than or equal to 1 year) – as per applicable income tax slab rates LTCG (more than 1 year) – 20% with indexation, 10% without indexation | ||||
| c. | Renunciation | Not Applicable | If the existing shareholder renounces the right in favor of a relative | Nil | |||
| If the existing shareholder renounces the right in favor of an unrelated party | Capital gains (as right to receive shares is a capital asset) where cost of acquisition will be Nil | ||||||
| d. | Taxation on person subscribing renounced shares | Not Applicable | If the person who subscribes the renounced shares is a relative of shareholder | Nil | |||
| If the person who subscribes the renounced shares is an unrelated party | FMV of the shares as exceeds the consideration paid by 50K will be taxed as income from other sources (Sec. 56(2)(vii)/Sec.56(2)(x) | ||||||
| 2 | Bonus shares | ||||||
| a. | Issue of bonus shares | Nil | Nil | ||||
| b. | Sale of bonus shares | Not Applicable | Capital gains – STCG (less than or equal to 1 year) – as per applicable income tax slab rates LTCG (more than 1 year) – 20% with indexation, 10% without indexation Where cost of acquisition will be Nil | ||||
| 3 | Sweat equity shares | ||||||
| a. | Issue | Nil | FMV of sweat equity shares as on date of allotment as reduced by amount, if any, paid by employee forms part of perquisites and taxed as per applicable slab rates | ||||
| b. | Sale | Not Applicable | Capital gains (same as in sale of rights shares) where cost of acquisition will be the FMV as on date of allotment | ||||
| 4 | ESOP | ||||||
| a. | Grant of ESOP | Nil. Company is allowed to treat compensation cost as expenses in P&L | Nil | ||||
| b. | Exercise of ESOP | Nil | FMV of shares as on date of allotment as reduced by amount, if any, paid by employee forms part of perquisites and taxed as per applicable slab rates | ||||
| c. | Sale of shares | Not Applicable | Capital gains (same as rights shares) where cost of acquisition will be the FMV as on date of allotment | ||||
| 5 | Issue of shares through private placement | ||||||
| a. | Issue | Nil | Nil | ||||
| b. | Sale | Not Applicable | Capital gains (same as rights shares) where cost of acquisition will be the price paid by the shareholder | ||||
| 6 | Buy-back of shares | 20% corporate tax on the distributed income (i.e., difference between the repurchase price and issue price of the shares) Sec. 115QA Effectively, 20% plus surcharge of 12% plus applicable cess of 4%, total 23.296% is the tax on the company buying back its shares | Nil | ||||
| 7 | Dividend | Nil Company is liable to deduct TDS on dividend income exceeding INR 5,000 @ 10% for residents and 20% for non-residents (subject to DTAA) | Dividend income shall be treated as income and taxed as per applicable slab rates. A deduction can be claimed for interest expense incurred against dividend restricted to 20% of dividend income received. | ||||
| 8 | Transfer of shares | Not Applicable | Scenario | Buyer | Seller | ||
| Transfer between related parties with or without consideration | Nil | Nil | |||||
| Transfer between unrelated parties: | |||||||
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Nil | Capital gains (same as in sale of rights shares) | |||||
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Difference between FMV and price paid to acquire shares (in so much as it exceeds INR 50,000) shall be treated as income from other sources and taxed as per applicable slab rates (Sec. 56(2)(x)) | Capital gains as above, but FMV shall be considered as consideration instead of actual consideration received (Sec. 50CA) | |||||
It is important to analyse the provisions of both the Acts – Companies Act and Income Tax Act in harmony as might be applicable to a particular transaction to ensure that the interest of the Company and the shareholders is protected while adequate compliance is made.
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Please reach out to Ms. Shilpa Agarwal at the mail ID shilpa@simplybiz.in or SimplyTransact@simplyBiz.in to know more.
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