From Tax Arbitrage to Tax Alignment: A Paradigm in Fiscal Philosophy
The Finance Act, 2024 marks a decisive turning point in India’s capital market taxation framework.
By abolishing Section 115QA and repealing Section 10(34A), the law dismantles the very foundation on which India’s ₹3.1 trillion buyback ecosystem operated for nearly a decade.
This is not a simple rate adjustment.
It is a policy correction rooted in tax equity, neutrality, and avoidance elimination — reflecting a shift from corporate-level taxation of capital returns to shareholder-level accountability.
The Structural Reversal — A Rebalancing of Tax Incidence
The Former Model — Company-Centric Taxation
Introduced through the Finance Act, 2013 (effective 2015), Section 115QA imposed a 20% buyback distribution tax on companies, with shareholders exempt under Section 10(34A).
Economically, this created a synthetic equivalence:
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The company’s post-tax profits were further taxed at 23.296% (inclusive of surcharge & cess).
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The shareholder, however, bore no incremental tax on receipt.
It effectively enabled wealth extraction without personal tax — an asymmetry vis-à-vis dividends, where post-2020 distributions were taxable in the hands of shareholders.
The New Model — Shareholder-Centric Taxation
Effective 1 October 2024, Section 115QA is abolished.
Buyback proceeds now fall under the definition of “dividend” under Section 2(22), taxable directly in the hands of shareholders.
| Parameter | Old Regime | New Regime |
|---|---|---|
| Tax Incidence | Company | Shareholder |
| Effective Rate | 23.296% | Up to 39% |
| Exemption | Section 10(34A) | Withdrawn |
| TDS | Not applicable | 10% (resident) / 20% (non-resident) |
🧩 Interpretation:
This inversion realigns India’s capital payout taxation with the principle of incidence following benefit — the beneficiary (shareholder) now bears the tax, not the distributor (company).
The Policy Logic — Beyond Revenue, Toward Equity
1. The Government’s Explicit Rationale
As stated by Revenue Secretary Sanjay Malhotra:
“Instead of paying dividends, companies were doing buybacks. This was a tax avoidance measure which has now been plugged.”
This statement is significant. It acknowledges that buybacks were used as a substitute for dividend distributions, purely for tax efficiency, not for legitimate capital restructuring.
Thus, the legislative intent is twofold:
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To restore neutrality between alternative forms of shareholder payout.
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To close systematic avoidance that eroded the integrity of the post-2020 dividend taxation framework.
2. The Economic Equity Argument
Under the earlier dispensation:
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A corporate earning ₹100 post-tax could distribute it via a buyback with an effective tax of ~23%.
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A similar distribution as dividend could trigger up to 39% in shareholder-level tax.
This disparity violated both horizontal equity (similar taxpayers treated differently) and vertical equity (higher-income taxpayers enjoying lower effective rates).
The new regime corrects this disequilibrium by equalizing marginal tax burdens across payout forms.
The Legislative Engineering — Deemed Capital Loss and TDS Architecture
1. The “Deemed Capital Loss” – Preventing Double Taxation
The amended proviso to Section 46A creates a notional capital loss equivalent to the acquisition cost of shares bought back.
This loss retains the nature of the original holding (long-term or short-term) and can be carried forward for 8 years under existing provisions.
Analytical Insight:
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This mechanism embodies economic consistency — ensuring that the cost of acquisition is not effectively taxed twice.
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It also converts what was earlier a tax-exempt capital receipt into a tax-neutral adjustment, preserving the accounting integrity of shareholder investments.
TDS and Withholding — Expanding the Compliance Perimeter
| Category | Section | Threshold | Rate | Remarks |
|---|---|---|---|---|
| Resident Shareholder | 194 | ₹10,000 | 10% | Mandatory deduction by company |
| Non-Resident | 195 | Nil | 20% (subject to DTAA) | Credit available under treaty |
From a compliance perspective, the TDS obligation now transforms every buyback into a reportable event under Form 26AS and AIS.
Even private limited companies conducting internal buybacks must comply — expanding the TDS universe beyond listed corporates.
Revenue and Market Economics — The Redistribution Effect
Fiscal Impact: Revenue Accrual
The exchequer’s gains are multifold:
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Higher yield: From 23% corporate-level to up to 39% individual-level taxation.
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Wider base: Each shareholder now contributes tax individually.
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Elimination of arbitrage: A structural anti-avoidance measure with self-executing enforcement.
From a macro-fiscal perspective, the measure strengthens progressive taxation while neutralizing the implicit subsidy high-income investors enjoyed.
Market Behaviour: Changing Corporate Finance Logic
Historically, buybacks served three functions:
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Signal of undervaluation
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Surplus distribution with tax efficiency
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Promoter liquidity mechanism
Post-2024, only the first survives.
With the erosion of tax advantage, the cost of buyback capital rises, leading to:
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Lower participation from resident HNIs and promoters.
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Higher premiums required to sustain shareholder interest.
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A likely reversion toward dividend declarations, especially among cash-rich IT and FMCG companies.
This is not a market deterrent — it’s a market correction, re-aligning capital allocation toward productive reinvestment rather than tax-optimized extraction.
Cross-Border Perspective — Treaty Relief and BEPS Alignment
Under the new regime, buyback proceeds are classified as dividends for tax purposes.
This reclassification triggers treaty-based benefits for non-resident investors, including FPIs and NRIs, under agreements such as India–Mauritius and India–UK.
| Jurisdiction | Typical Treaty Rate | Credit Eligibility |
|---|---|---|
| Mauritius | 5–15% | Yes |
| UK | 10–15% | Yes |
| USA | 15–25% | Yes |
Analytical Impact:
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Level-Playing Field Restored:
The same distribution now qualifies for foreign tax credit, avoiding double non-taxation. -
BEPS Consistency:
Aligns India’s framework with OECD principles — taxation of economic substance and beneficial ownership. -
MNC Structuring Impact:
Buyback-driven profit repatriation routes lose appeal; legitimate dividend-based routes regain primacy.
Compliance, Litigation, and Transitional Risks
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Transitional Complexity:
Buybacks approved pre-October 2024 but executed post-October may trigger timing disputes.
The determinative event remains the payment date, not approval date — an interpretive area inviting potential litigation. -
Reporting and Audit Challenges:
Dual reporting under Schedule OS (for dividend) and Schedule CG (for deemed capital loss) complicates ITR reconciliation.
Corporates must ensure precise TDS accounting to prevent mismatch-driven demands. -
Professional Oversight:
The transition repositions Chartered Accountants and tax advisors as central compliance anchors, especially for cross-border shareholders invoking treaty relief.
Policy Evaluation — A Case Study in Fiscal Rationalization
| Objective | Legislative Action | Outcome |
|---|---|---|
| Eliminate Arbitrage | Abolished Section 115QA | Tax parity between dividends and buybacks |
| Restore Progressivity | Taxed at slab rates | High-income alignment |
| Maintain Equity | Introduced deemed capital loss | Prevents over-taxation |
| Improve Compliance | Mandatory TDS | Built-in traceability |
| Align Globally | Dividend reclassification | OECD/BEPS consistency |
From a tax policy design standpoint, this is a model amendment — self-contained, non-retrospective, and enforcement-efficient, achieving GAAR-equivalent outcomes without litigation.
Market Outlook — From Incentive to Integrity
The amendment is likely to induce a structural contraction in buyback volumes, reversing the exponential growth observed between FY2015–FY2024.
However, this decline is healthy — it restores corporate discipline.
Surplus deployment will now gravitate toward:
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Business expansion
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Debt reduction
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Dividend distribution
rather than cyclical buyback programs aimed at EPS management or promoter exits.
Analytically, this marks the normalization of capital return behaviour — a shift from form-driven distribution to substance-driven decision-making.
The Deeper Lesson — A Shift in India’s Fiscal Philosophy
India’s approach to taxing capital distribution has evolved across three phases:
| Phase | Regime | Characteristic |
|---|---|---|
| 2013–2019 | Corporate-level DDT / Buyback tax | Regressive and opaque |
| 2020–2023 | Shareholder-level dividend tax, buyback exemption | Dual-channel arbitrage |
| 2024 onwards | Unified shareholder-level taxation | Progressive and neutral |
The 2024 reform thus completes a decade-long rationalization — from fragmented to integrated, from form to fairness.
It brings India’s taxation of shareholder returns in harmony with mature jurisdictions, where incidence consistently follows beneficial ownership.
Conclusion — The End of Tax Arbitrage, The Rise of Tax Integrity
The abolition of Section 115QA and corresponding reclassification of buyback proceeds as dividends represent more than administrative streamlining.
It symbolizes the restoration of fairness, parity, and fiscal transparency in India’s capital market taxation.
Buybacks will survive, but only for genuine valuation or capital efficiency reasons — not for tax convenience.
For the first time in a decade, dividends and buybacks now stand on equal fiscal ground — and corporate capital allocation will finally be judged on economic merit rather than tax calculus.
Analytical Summary
| Dimension | Analytical Insight |
|---|---|
| Legal | Section 115QA repeal transfers incidence to shareholders, ending double-layer taxation asymmetry |
| Economic | Equalizes post-tax distribution efficiency, discouraging avoidance-based capital extraction |
| Fiscal | Strengthens progressive revenue base without GAAR invocation |
| Behavioral | Shifts corporate finance focus from arbitrage to value creation |
| Global | Aligns India with BEPS-driven global anti-avoidance consensus |
In Essence
The Finance Act, 2024 has not merely rewritten a section — it has redefined the moral logic of capital taxation.
Buybacks will no longer be a strategy of privilege, but a choice of prudence.
