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CBDT issues final rules for taxing share-buyback
October, 19th 2016

The Central Board of Direct Taxes (CBDT) has come out with the final rules for computing the share buyback tax payable under the income tax law.

The move is expected to address the issues relating to taxation of buybacks carried out by companies and thereby reduce litigation.

The final rules provide for computation mechanism of ‘amount received’ in 12 different scenarios depending upon manner of issue of shares (for example regular issue, amalgamation, demerger, bonus issue, conversion of bond or debenture, sweat equity share issue, share-buyback in demat form etc).

The rules have been finalised based on the stakeholders’ comments received to the draft rules issued by the CBDT in July this year.

Reacting to the development, Amit Agarwal, Partner, Nangia & Co, said the notification of the final rules in relation to methodology for determining the amount received by the company, under different circumstances in which shares have been issues, was much awaited.

The ambit of the final rules is wider than the draft rules in many respects, he said.

Amit Singhania, Partner, Shardul Amarchand & Mangaldas, a law firm, said that the final rules provide four additional specific circumstances for determining the issue price of shares. These include shares issued pursuant to an ESOP scheme, shares issued/ allotted by the company as part of consideration for acquisition of any asset or settlement of any liability, shares issued by a company on conversion and succession and shares issued on conversion of preference shares.

Additionally, the final rules extend the first in first out rule to shares bought back in demat form that cannot be distinctly identified.

Previously, the draft rules provided that while determining the issue price of shares where the company had at any time, prior to the buy-back of the share, returned any sum out of the amount received in respect of such share such sum so returned should be reduced.

The final rules provide a welcome change in that they also prescribe that no such reduction will be warranted if the sum so returned was chargeable to DDT (dividend distribution tax) in the first instance, which was paid by the company. This eliminates the double taxation of amount already levied with DDT, Singhania said.

Agarwal said that the clarification with respect to amount received by the company in case of ESOP/sweat equity shares is quite logical and would go a long way in rationalising the tax impact arising on buy back of such shares.

In absence of clear provisions in this regard, there was a trend to shift the tax cost of buyback of ESOP shares to the employees, he said.

“Overall the final rules appreciate the business and commercial realities that are associated with issuance of shares in different scenarios,” Agarwal said.

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