Unlisted companies resorting to buyback of shares will soon have clarity on the manner in which the 20 per cent buyback distribution tax (BBDT) needs to be computed on their buyback transactions.

Post the budget 2016-17 move to expand the coverage of BBDT to wider situations of buybacks of shares -- including those shares arising from mergers and bonus issues, the CBDT has now issued draft rules spelling out the manner in which “distributed income” be computed for the purpose of BBDT.

Comments on the draft rules could be sent electronically by July 31, the CBDT said in an official release on Monday.

In the absence of specific guidance, corporates were at a loss on computation of BBDT in situations where shares were issued under non-cash considerations (mergers, bonus issues etc). Now, the draft rules have sought to cover seven scenarios depending on the manner of issue of shares.

Plugging Loopholes

In 2013, the Centre had come up with a provision to subject unlisted companies resorting to buyback of shares to 20 per cent tax on the incomes distributed by them through this route.

This was essentially aimed at curtailing companies from distributing dividends under the garb of buyback of shares.

Under the income tax law, dividends distributed by companies attract dividend distribution tax at the hands of the company. On the other hand, the gains made from buyback are taxable at the hands of the shareholders.

However, when the shareholders were located in jurisdictions such as Mauritius, they were not subject to tax for the buyback transactions. This is because capital gains were exempted in these jurisdictions due to treaty benefits enjoyed by them.

As a tax avoidance mechanism, several companies resorted to buyback of shares instead of distributing dividends. With this alternative route, neither the company nor the shareholders paid any tax.

To plug this loophole, the Centre had through Finance Act 2013 introduced new provisions in income tax law requiring a domestic unlisted company buying back its own shares to pay a tax at the rate of 20 per cent on the "distributed income", popularly known as BBDT.

Experts’ Take

Pranay Bhatia, Partner – Direct Tax, BDO India. said that since June 2013, the Income-tax Act is amended to specifically levy tax on the company buying back its shares.

This is generally not the tax implication as the income usually arises at the hands of shareholders and not the company buying back the shares. This is a Specific Anti-Avoidance Rule (SAAR) and how these provisions will play out after General Anti Avoidance Rules becomes effective from April 2017 is something to look out for, Bhatia said.

Amit Singhania, Partner, Shardul Amarchand Mangaldas & Co, a law firm, said that the draft rules conceptualise seven different circumstances for determination of consideration for issue of shares. The draft rules exhaustively covers the applicable circumstance and should address the concerns of the taxpayers, he said.

However, both the tax experts noted that certain situations such as buyback of shares issued as ESOPs or Sweat Equity need to be addressed.