I live in Dubai. Three years ago I bought 5,000 shares in an Indian company at a valuation of £200 per share. Because promoters want to alleviate investors, the company is now planning to buy back shares at £500 per unit in May 2025. Will I be liable to pay a repurchase tax in India, or will the company discharge the tax obligation on my behalf?
-Name withheld upon request
Prior to the changes to the Finance (no. 2) ACT, 2024, a domestic company was paid an additional income tax at 20% (plus applicable allowance and CESS) on the amount of distributed income (namely return price less issue price of shares). Consequently, this amount was exempt from tax in the hands of the shareholders (both resident and non-resident).
With effect from 1 October 2024, an Indiaas company is no longer liable to pay tax on the amount of income that is distributed by it via stock buying. The tax treatment has been completely changed due to the changes made in the Finance (No. 2) ACT, 2024.
According to the changes to the provisions of the Income Tax Act, 1961, the entire amount paid by an Indian enterprise when taking its shares is now being treated as a dividend in the hands of its shareholders. Such a dividend would be taxed to tax the respective plate rates of the shareholders.
Furthermore, no deduction of purchase costs or other expenses would be permitted against this dividend income. Instead, challenging rights would generate a capital loss that is equivalent to the costs of acquiring the shares, whereby the sale is considered zero. It can be noted that the indexation advantage has also been removed under the law. The resulting capital loss could be compared to other capital gains obtained, either in the same tax year or in the following eight tax years.
In your situation it would be income £25 Lakh, while the loss of capital is long -term £10 Lakh. This loss can only be compared to other wealth profit in the long term.
For non-residents, both TDS and the final tax are levied at a rate of 20% (plus applicable allowance and cess) under the ITA on dividends. Since the income that arises from the return as a dividend is taxed in the same way under ITA as an actual division of dividends, you are eligible to use the benefits of Article 10 of the India-Uae Taxation Direction Agreement (DTAA) (DTAA) (DTAA) that provides for a reduced tax. This would be subject to compliance with the documentation requirements, such as providing TRC and form 10f.
Harshal Bhuta, is a partner at PR Bhuta & Co., Chartered Accountants.
