SKP Tax Alert
Volume 9 Issue 14 |
Draft Income Tax Rules to determine the amount received by a company with respect to shares for determining buy-back tax

Currently, under the provisions of the Income Tax Act, 1961, ‘buy-back tax’ is levied at the rate of 20 percent on the ‘distributed income’ arising out of the buy-back of unlisted shares by the domestic company. ‘Distributed income’ was defined to mean the consideration paid by the company on buy-back of shares as reduced by the amount which was received by the company for the issue of such shares.

The Finance Act, 2016 amended the definition of ‘distributed income’ (with effect from 1 June 2016) to mean the consideration paid by the company on buy-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.

Accordingly, the Central Board of Direct Taxes (CBDT) has now come up with draft rules to prescribe the manner of determining the amount received by the company on the issue of shares under different circumstances. The draft rules are stated below.

  Situation Manner of determination of ‘amount received’
1. Share issued by a company on its subscription Paid-up amount actually received by the company including share premium
2. When certain sum is returned prior to buy-back Amount received minus the sum so returned
3. In case of any amalgamation of the company prior to buy-back, shares issued by the amalgamated company in lieu of shares of the amalgamating company Amount received by the amalgamating company with respect to such shares
4. In case of demerger, shares issued by resulting company Amount received by demerged company on the original shares are to be divided in the ratio of net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger
5. Bonus shares or shares issued without consideration Nil
6. Shares issued on the conversion of bond or debenture, debenture-stock or deposit certificate Amount received by the company in respect of the instrument so converted
7. In any other cases Face value of the shares
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SKP's comments

Some of the issues/cases which require clarification are:
  • On the issue of shares for consideration other than cash, no amount is actually received by the company. It only receives asset/know-how, etc. The rules mentioned above are silent in this regard.
  • Similarly, clarity is required in cases where shares are issued under the Employee Stock Option Scheme free of cost or at discounted price to its face value.
  • There is no specific clarification for equity shares converted out of preference shares.
  • Where shares are issued in tranches at various points in time, it is necessary to know whether the FIFO (First In First Out) method or average method should be followed to determine the amount received or whether it should be specifically identified on the basis of each of the shareholders.
Apart from the above, for sums returned prior to buy-back (in the second situation), there is no mention of what kind/form of sum returned to shareholders are to be considered while determining the amount received.

If the aspects mentioned above are clarified, the final rules will be more comprehensive in its scope.
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