SKP Tax Alert
Volume 9 Issue 19 | 28 October 2016
CBDT releases Buyback Tax Rules

 The Finance Act 2016 amended the definition of ‘distributed income’, with effect from  1 June 2016, to mean consideration paid by the
companyonbuy back of shares as reduced by the amount, which was received by the company for the issue of such shares, determined in the manner as may be prescribed.  
In this regard,Central Board of Direct Taxes (CBDT) had put forth draft rules (on 25 July 2016) prescribing the manner of determining the amount received by the company in respect of shares under various circumstances. The CBDT had asked the general public and stakeholders to share their comments and suggestions on the draft. Based on these the CBDT has now finalised the rules for valuing the amount of receipt in various circumstances vide notification no. 94/2016 (F. No. 370133/30/2016 – TPL) dated 17 October 2016.
The table below presents all related rules and points out the modifications/changes made in the final one. We have highlighted the modifications in bold and italics.

 
Sr No Situation Manner of determining ‘amount received’
1 Share issued by a company on its subscription Paid up amount actually received by the company including Share Premium
2  Where a certain sum is returned before the buy back Amount received minus sum so returned
 
However, if Dividend Distribution Tax (DDT)/any other taxes relating to such repayment has already been paid on the amount so returned, then such an amount shall not be reduced
3 Issue of shares under Employee Stock Option Scheme or Sweat Equity shares Fair market value of the stock to the extent it is credited to the share capital and share premium account
4 In case of any amalgamation of the company before buyback, shares issued by an amalgamated company in lieu of shares of the amalgamating company Amount received by the amalgamating company in respect of such shares
5 In case of a demerger, shares issued by resulting company Amount received by demerged company on original shares should be divided in the ratio of the net book value of the assets transferred in a demerger; to the net worth of the demerged company immediately before such a demerger
6 In case of a demerger, in the hands of demerged company Amount received shall be reduced by the amount determined in situation five described above
7 Shares issued in consideration for acquisition of an asset or settlement of liability Amount received=A/B
 
A= Lower of the following amounts
  1.  (Fair Market Value of assets as determined by the Merchant Banker *Consideration being paid by issue of shares)/Total Consideration
  2.  
  3. Consideration paid in form of shares to the extent credited to share capital and share premium account
B = Number of shares issued as part of consideration
8 Shares issued on succession or conversion of a firm or proprietary concern by company Amount received = A-B
                                      C
A=Book value of assets in balance Sheet – (TDS/TCS/Advance tax – Refund ) – Amount
shown as asset, which does not represent the value of any asset including unamortised amount of deferred expenditures
 
For determining book value of assets, any change in
value of assets consequent to their revaluation must be ignored.
 
B = Book value of liabilities excluding
  • Capital
  • Reserves and surplus
  • Provision for tax
  • Provisions for unascertained liabilities
  • Contingent liabilities
 
 C = Number of shares issued on conversion or succession
9 Bonus Shares or shares issued without consideration NIL
10 Share issued on conversion of preference shares, bond or debenture, debenture-stock or deposit certificate Amount received by the company in respect of the instrument converted
11 Shares held in dematerialised form and which cannot be distinctly identified The amount received for the issue of shares on the basis of the first-in-first-out method.
12 In any other cases Face value of the shares

  
SKP's comments

The changes incorporated in the Final Rules attempts to cover almost all open ended aspects highlighted in the Draft Rules.
This approach of the CBDT is highly appreciated and helps reduce doubts and ambiguities in the law to a certain extent.

 

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