Under the Income Tax Act 1961 (IT Act), buy back of unlisted shares by a company attracts additional corporate tax (Buy Back Tax/ BBT) in the hands of the company and the resulting capital gains, if any, in the hands of the shareholders are exempt from tax. The BBT is levied at the rate of 20% (plus applicable surcharge and cess) on the difference between the amount which was received by the company for issue of shares (Amount) and the consideration paid by the company on buy-back of such shares.
The Central Board of Direct Taxes (CBDT) has now issued draft rules1 (Draft Rules) for prescribing the manner of determination of Amount in various scenarios as set out below. The Draft Rules will be finalised after considering comments of the stakeholders and public, and will then be incorporated in the Income Tax Rules, 1962.
| S. No | Circumstances | Amount |
| 1 | Issuance of shares by way of subscription | The amount actually received by the company including share premium |
| 2 | Return of any sum out of amount originally received in respect of shares prior to the buy-back of such shares by the company | Difference between the amount received by the company less the returned sum |
| 3 | Issuance of shares by an amalgamated company under a scheme of amalgamation in lieu of shares of the amalgamating company | The amount received by the amalgamating company is respect of such shares |
| 4 | Demerger: | |
| a. Issuance of shares by a resulting company | The amount received by the demerged company in respect of the original shares in the same proportion as the net book value of assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger | |
| b. Original shares issued by the demerged company | The amount received by the demerged company originally less the amount determined under 4(a) | |
| 5 | Issuance of bonus shares | The amount will be considered to be NIL |
| 6 | Issuance of shares upon conversion of bonds or debenture or debenture-stock or deposit certificate (instrument) | The amount originally received by the company on issuance of the instrument |
| 7 | Issuance of shares in any other case | The face value of the shares will be deemed to be the amount received by the company for issuance of shares |
The comments on the Draft Rules, if any, can be submitted by the stakeholders and general public by 31 July 2016.
Comment
This is another instance where the government is adopting a consultative approach, as stakeholders have been given an opportunity to provide comments on the Draft Rules before finalisation. The circumstances dealt with under the Draft Rules are exhaustive and thus, there is greater clarity around applicability of BBT. However, the Draft Rules do not deal with the scenarios such as: (i) conversion of one kind of shares into another (say convertible preference shares); (ii) issuance of shares in tranches/different lots having different subscription price; and (iii) issue of shares for a consideration other than cash. The final rules can be expected to address them.
Footnote
1. F No 370133/30/2016-TPL Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes – Draft Rules for prescribing the manner of determination of amount received by the company in respect of share – section 115QA of the Income-tax Act, 1961 – reg. – dated 25 July 2016
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