CBDT issues final rules for taxing share buy back by companies

Seeking to minimise litigations over taxation, CBDT has come out with rules for computing distributed income arising out of issue of shares following buy back, demerger, amalgamation or bonus issue by companies.

The Central Board of Direct Taxes (CBDT) has introduced new Rule 44BB for computing amount received by a company in respect of issue of share for computing buy back tax payable.

The rules take effect from June 1, 2016.

The final rules provide for computation mechanism of 'amount received' in 12 different scenarios depending upon the manner of issue of shares — regular issue, amalgamation, demerger, bonus issue, conversion of bond or debenture, sweat equity share issue and share-buyback in demat form.

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

"In absence of clear provisions in this regard, there was a trend to shift the tax cost of buy back of ESOP shares to the employees. This will help in alleviating any open issues in relation to buy backs, thereby reducing litigation," Nangia & Co Partner Amit Agarwal said.

Industry has been waiting for the final rules in relation to methodology for determining the amount received by the company, under different circumstances in which the shares have been issued.

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

The final rules also cover issuance of equity shares, pursuant to conversion of a firm into company or succession of a sole proprietorship by a company.

In case of issue of shares for acquiring an asset or settling a liability, the requirement of obtaining a fair market value report of the merchant banker is an onerous requirement, he said.

"While the intention of the CBDT is to obtain a fair valuation, we believe that the valuation responsibility should have been casted on certified assets valuers or chartered engineers," he added.