Under the Income Tax Act 1961 (IT Act), buy back of unlisted shares by a company attracts additional corporate tax (Buy Back Tax/ BBT) in the hands of the company and the resulting capital gains, if any, in the hands of the shareholders are exempt from tax. The BBT is levied at the rate of 20% (plus applicable surcharge and cess) on the difference between the amount which was received by the company for issue of shares (Amount) and the consideration paid by the company on buy-back of such shares.
The Central Board of Direct Taxes (CBDT) has now issued draft rules1 (Draft Rules) for prescribing the manner of determination of Amount in various scenarios as set out below. The Draft Rules will be finalised after considering comments of the stakeholders and public, and will then be incorporated in the Income Tax Rules, 1962.
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The comments on the Draft Rules, if any, can be submitted by the stakeholders and general public by 31 July 2016.
This is another instance where the government is adopting a consultative approach, as stakeholders have been given an opportunity to provide comments on the Draft Rules before finalisation. The circumstances dealt with under the Draft Rules are exhaustive and thus, there is greater clarity around applicability of BBT. However, the Draft Rules do not deal with the scenarios such as: (i) conversion of one kind of shares into another (say convertible preference shares); (ii) issuance of shares in tranches/different lots having different subscription price; and (iii) issue of shares for a consideration other than cash. The final rules can be expected to address them.