ADVICE THAT MATTERS

Volume 3 November 2016

TAXATION INCIDENCE ON BUY-BACK OF SHARES:

FORMALISATION OF GUIDELINES
Buy Back suggests purchase of its own shares by a Company in accordance with the scheme of corporate law and
other general regulations.
Unlisted Companies, as part of tax avoidance scheme, were resorting to buy back of shares instead of payment of
dividends to avoid Corporate Dividend Tax particularly in circumstances where shareholders were either not
chargeable to tax or were taxable at a lower rate.
To curb such practice by domestic unlisted companies, Sec(s) 115QA to 115QC were introduced in Chapter XII-DA
wherein in addition to the income tax chargeable in respect of the total income, any amount of distributed income
by the Co. on buy-back of unlisted shares be charged to 20% tax on the distributed income1.
The Central Board of Direct Taxes (CBDT), the apex tax administration body, introduced rules through a
notification in October, 2016 w.e.f from June 1st, 2016 to resolve the ambiguity with regard to the determination
2
of distributed income. Rule 40BB prescribes the computation mechanism for distributed income under 12
different circumstances, which have been summarized hereunder:

S.No.

Situation

Determination of
Amount Received

1.

On Subscription

Paid up Amount including Share Premium.

2.

Where certain sum is returned back

prior to BB

Amount received less such sum returned.

3.

Under a Plan or a scheme (ESOP)

Amount received according to the FMV as

determined under Rule 3(8) of Income
Tax Rules, 1962.

4.

Shares issued by amalgamated Co

in lieu of shares of amalgamating Co

Amount received in lieu of such share(s)

5.

Demerger (Resulting Co.)

Amount received by the demerged Co. in respect

of the original shares in proportion of the net book
value of the assets transferred to the net worth of
the demerged Co., prior to such demerger.

6.

Demerger (Demerged Co.)

Amount received shall be reduced by the amount

determined in situation 5.

7.

As part of any consideration for

acquisition or settlement of any
liability

Amount received (A/B)

On succession or conversion

Amount received (A-B/C)

8.

Where A denotes the least of FMV of asset or

liability or the consideration paid, to the extent
credited to the share capital and share premium
account; And B denotes the no of shares issued
by the Co.

Where A denotes BV of assets less (taxes

deducted, advance taxes and any unamortized
deferred expenditure); and
B denotes BV of liabilities; and C denotes No. of
shares issued on conversion or succession
9.

Bonus shares or shares issued

without consideration.

NIL

10.

Share issued on conversion of bond

or debenture, debenture-stock or
deposit certificate.

Amount received in respect of the instrument

so converted.

11.

Shares bought back in Demat and

cannot be distinctly identified

Amount received for issue of shares basis First-in

first-out method.

12.

In any other cases

Face Value of the Shares

KEY CONCERNS
Expenditure incurred by the Company buying back,
should be allowed to claim deduction of the
expenses while computing distributed income.
The said rules do not take into consideration the
purchase of Shares in Tranches and Partial Buy
Back and transfer of shares by original shareholder
to another shareholder.
It is still unclear as to whether the residuary
category would also cover situations such as issue
of Buy-back of shares issued in kind and share
swap.

The suggested rules also prescribe that no

reduction would be warranted if the sum or any
part thereof was so repaid, already subject to
Dividend Distribution Tax (DDT) in the first
instance, paid by the Company thereby eliminating
the double taxation of amount already levied with
DDT.
Section 115QA is a SAAR (Specific Anti Avoidance
Rule) and with the advent of General Anti
Avoidance Rules (GAAR) w.e.f April 1, 2017 the
interplay of SAAR v. GAAR would be worth
watching;

TAKE AWAYS
The formation of rules is a welcome step which do
provide the much-needed clarity with regard to the
manner of determination of consideration for the
Buy-back computation in certain given situation.
The rules further envision the first-in first-out
method (FIFO) in respect of shares being bought
back in DEMAT form which cannot be distinctly
identified;
1

Distributed Income as amended vide Finance Act, 2016 is defined as, consideration paid by the Company on buy-back of shares as reduced
by the amount which was received by the Company for issue of such shares, determined in the manner as may be prescribed.

Income-Tax (28th Amendment), Rules, 2016; Notification No. 94/2016, [F No 370133/30/2016-TPL dated Oct 17,2016] effective from
June 1, 2016.

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