Section 115-O(1A)(i) of the Income Tax Act, 1961 deals with the tax on distributed income by domestic companies. This section was introduced in the year 2016 and has since been a significant provision in the income tax laws of India. In this blog, we will take a closer look at the provisions of Section 115-O(1A)(i) of the Income Tax Act and its implications for domestic companies.
Overview of Section 115-O(1A)(i)
Section 115-O(1A)(i) of the Income Tax Act, 1961, deals with the tax on distributed income by domestic companies. According to this provision, any amount declared, distributed, or paid by a domestic company by way of buyback of shares, in excess of the amount received by the company for such shares, shall be deemed to be the income of the company and shall be charged to tax at the rate of 20%.
Implications of Section 115-O(1A)(i)
The provisions of Section 115-O(1A)(i) have several implications for domestic companies. Let us discuss some of the important implications below:
Tax on excess buyback amount: Domestic companies that undertake buyback of shares must be aware of the provisions of Section 115-O(1A)(i). If a company declares, distributes, or pays any amount in excess of the amount received by the company for such shares, such excess amount shall be deemed to be the income of the company and shall be charged to tax at the rate of 20%. Therefore, it is important for companies to ensure that the buyback price is not more than the amount received by the company for such shares.
Impact on shareholders: The provisions of Section 115-O(1A)(i) can have an impact on shareholders as well. If a company declares, distributes, or pays any amount in excess of the amount received by the company for such shares, such excess amount shall be deemed to be the income of the company and shall be charged to tax at the rate of 20%. This means that the amount received by the shareholders in excess of the amount paid by them for the shares will be subject to additional tax.
Compliance requirements: Domestic companies must comply with the provisions of Section 115-O(1A)(i) while undertaking buyback of shares. The company must ensure that the buyback price is not more than the amount received by the company for such shares. In addition, the company must also ensure that the tax on distributed income is paid within the specified time limit.
Tax on Distributed Income
As per the provisions of Section 115-O(1A)(i), the distributed income shall be deemed to be the income of the company and shall be charged to tax at the rate of 20%. The distributed income in this case refers to the excess amount paid by the company for buyback of shares. For instance, if a company buys back shares at Rs. 100 per share, but distributes Rs. 110 per share, then the additional Rs. 10 per share shall be considered as the distributed income and shall be subject to tax at 20%.
Compliance Requirements
Domestic companies must comply with the provisions of Section 115-O(1A)(i) while undertaking buyback of shares. The company must ensure that the buyback price is not more than the amount received by the company for such shares. The excess amount paid shall be deemed as distributed income and shall be taxed at 20%.
The company must also pay the tax on distributed income within the specified time limit. The tax shall be payable by the company in the assessment year in which the buyback takes place. If the tax is not paid within the specified time limit, interest shall be levied on the amount of tax due.
Impact on Shareholders
The provisions of Section 115-O(1A)(i) can also have an impact on the shareholders of the company. If the company pays an excess amount for buyback of shares, the amount received by the shareholders in excess of the amount paid by them for the shares shall be considered as distributed income and shall be subject to tax at 20%.
Therefore, while deciding to participate in the buyback, the shareholders must be aware of the tax implications and the buyback price set by the company. If the buyback price is more than the amount paid by the shareholder, the additional amount shall be subject to tax.
Conclusion
In conclusion, Section 115-O(1A)(i) of the Income Tax Act, 1961 is an important provision that deals with the tax on distributed income by domestic companies. While undertaking buyback of shares, the company must ensure that the buyback price is not more than the amount received by the company for such shares to avoid any additional tax liability.
The shareholders must also be aware of the tax implications and the buyback price set by the company. The excess amount paid for buyback of shares shall be considered as distributed income and shall be subject to tax at 20%. Compliance with the provisions of Section 115-O(1A)(i) is important for domestic companies to avoid any penalty or interest.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
What is Section 115-O(1A)(i) of the Income Tax Act, 1961?
Section 115-O(1A)(i) of the Income Tax Act, 1961 is a provision that deals with the tax on distributed income by domestic companies. It states that the distributed income shall be deemed to be the income of the company and shall be charged to tax at the rate of 20%.
What is distributed income?
Distributed income refers to the excess amount paid by the company for buyback of shares. It is the amount distributed to the shareholders in excess of the amount paid by them for the shares.
Who is liable to pay tax on distributed income?
The company is liable to pay tax on distributed income at the rate of 20%.
When is the tax on distributed income payable?
The tax on distributed income is payable by the company in the assessment year in which the buyback takes place.
What happens if the tax on distributed income is not paid within the specified time limit?
If the tax on distributed income is not paid within the specified time limit, interest shall be levied on the amount of tax due.
What is the impact of Section 115-O(1A)(i) on shareholders?
If the company pays an excess amount for buyback of shares, the amount received by the shareholders in excess of the amount paid by them for the shares shall be considered as distributed income and shall be subject to tax at 20%.
Can a company pay an excess amount for buyback of shares?
No, the company cannot pay an excess amount for buyback of shares. If the company pays an excess amount, it shall be considered as distributed income and shall be subject to tax at 20%.
What are the compliance requirements for companies under Section 115-O(1A)(i)?
The company must ensure that the buyback price is not more than the amount received by the company for such shares. The company must also pay the tax on distributed income within the specified time limit.
How does Section 115-O(1A)(i) impact the decision of shareholders to participate in a buyback?
The shareholders must be aware of the tax implications and the buyback price set by the company. If the buyback price is more than the amount paid by the shareholder, the additional amount shall be subject to tax.
What is the rate of tax on distributed income under Section 115-O(1A)(i)?
The rate of tax on distributed income under Section 115-O(1A)(i) is 20%.
