18 October 2016 EY Tax Alert Indian tax administration issues final rules on certain aspects for determining buy-back tax in India Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. The Indian Tax Laws (ITL) provide for a levy of buy-back tax (BBT) @ 20% [1] of the distributed income arising on buy-back of unlisted shares by a domestic company [2]. Distributed income is defined as the difference between the consideration paid by domestic company on buy-back of shares and the amount received by such company on issue of such shares bought back. There was a lack of clarity about determination of the amount received by a domestic company in different circumstances viz. where shares may have been issued by the company in tranches, for different considerations, or may have been issued in lieu of existing shares of another company under a corporate reorganization involving merger, demerger, conversion, succession etc. The ITL was amended by Finance Act 2016 [3] to empower Central Board of Direct Taxes (CBDT), the apex administrative body of direct taxes in India, to make rules for determination of the amount received by the company for issue of shares being bought back. Pursuant to that and as a part of consultative process, the CBDT had issued [4] draft rules (Draft BBT Rules) on 25 July 2016 to provide for determination of the amount received by the company for issue of shares bought back [5]. [1] Increased by applicable surcharge and cess [2] For the purposes of ITL, a domestic company means an Indian company or any other company which, in respect of its income liable to tax under the ITL, has made prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, payable out of such income. [3] Refer EY Tax Alert dated 1 March 2016 on key international tax proposals of India Budget 2016 [4] Vide CBDT Letter dated 25 July 2016 [5] Refer EY Tax Alert dated 25 July 2016 on Indian tax administration issues draft rules on certain aspects for determining buy-back tax in India
Based on the comments received by stakeholders and the public on the Draft BBT Rules, the CBDT has released Final BBT Rules [6] on 17 October 2016. The Final BBT Rules provide for the methodology for determining the amount received by a domestic company on issue of shares under different circumstances. The Final BBT Rules comes into force with effect from 1 June 2016. Final BBT rules The Final BBT Rules provide for the methodology for determination of the amount received by the company in respect shares issued, being subject matter of buy-back under different circumstances, as follows: This Tax Alert highlights the Final BBT Rules. Background The ITL provides for a levy of BBT @ 20% [7] of the distributed income arising on buy-back of unlisted shares by a domestic company. BBT is an additional tax in the hands of the domestic company and the distributed income is not taxed again in the hands of the shareholders. For computation of BBT, distributed income is defined as the difference between the consideration paid by the domestic company on buy-back of shares and the amount received by the company for issue of such shares. Pursuant to powers given under the amended ITL, the CBDT released the Draft BBT Rules on 25 July 2016 in order to provide clarity in determination of the consideration received by the company at the time of issue of shares (which are being bought back by the company). The Draft BBT Rules aimed to provide guidance in respect of determination of the amount received for shares issued on merger/demerger, on conversion of debenture, issue of bonus shares etc. Based on the comments received from stakeholders and the public, the CBDT has released the Final BBT Rules on 17 October 2016. The Final BBT Rules comes into force with effect from 1 June 2016 and apply to buy-back of shares effected thereafter. [6] Vide CBDT Notification No. 94 of 2016 [7] Increased by applicable surcharge and cess
Sub Circumstance (under which bought rule back shares have been issued) 2. Shares issued on subscription by any person 3. Return of any amount in respect of share, prior to buyback 4. Shares issued under Employee Stock Option Scheme or as a part of sweat equity shares 5. Shares issued by the amalgamated company in lieu of shares of an amalgamating company in a scheme of amalgamation 6. Shares issued by the resulting company under a scheme of demerger 7. Amount received by the demerged company in respect of original shares post demerger 8. Shares issued or allotted by the company as part of consideration for acquisition of any asset or settlement of any liability 9. Shares issued or allotted by a company on succession or conversion of a firm into the company or succession of sole proprietary concern by the company Basis of determining amount received by the company Amount actually received towards paid up amount and share premium Amount received in respect of share as reduced by the sum so returned. However, if the sum so returned was chargeable to DDT [8] and company has paid DDT on the same, then such sum returned shall not be reduced. Fair market value of the shares as determined in accordance with employee perquisite valuation rule [9] to the extent credited to the share capital and share premium account Amount received by the amalgamating company (as determined in accordance with this rule) at the time of issuance of shares is deemed to be the amount received by the amalgamated company in respect of shares issued pursuant to amalgamation Proportionate amount received by the demerged company in respect of original shares (as determined in accordance with this rule) (say, Y) Proportion to be determined based on the net book value of assets transferred in a demerger to the total net worth of the demerged company immediately before such demerger Original issue price (say, X) minus amount determined under sub-rule (6) above as issue price of shares of the resulting company (Y) [i.e., X-Y] Amount received = A/B Where, A = An amount being lower of the following: (a) Proportionate amount of fair market value (FMV [10] ) of asset or liability. Such proportion to be determined based on part of consideration paid by issue of shares to the total consideration. (b) Amount of consideration to the extent credited to share capital and share premium account B = Number of shares issued as part of consideration Amount received = A B C Where, A = Book value of assets in balance sheet (as reduced by amount [11]
10. Shares issued or allotted without any consideration on the basis of existing shareholding in the company 11. Shares issued by the company on conversion of preference shares or bond or debenture, debenture-stock or deposit certificate in any form or warrants or any other security issued by the company 12. Shares held in dematerialized form and the same cannot be distinctly identified For determining the book value of assets, any change in the value of assets consequent their revaluation shall be ignored. B = Book value of liabilities in balance sheet excluding specified amounts [12] C = Number of shares issued on conversion or succession Nil Amount received by the company in respect of the instrument so converted Amount received shall be determined on the basis of the first-in-first-out method 13. In any other case (residual category) Face value of the share [8] Dividend distribution tax u/s 115-O [9] Rule 3(8) [10] As determined by a Merchant Banker [11] (i) taxes paid as deduction or collection or advance tax, excluding the amount of income tax claimed as refund under the ITL; (ii) any amount shown in balance sheet as asset not representing any value, viz. unamortized amount of deferred revenue expenditure. [12] (i) the amount representing capital of proprietor/partners of firm, (ii) reserves and surplus, (iii) provision for taxation other than tax paid either as deduction or collection at source and advance tax, to the extent of excess taxes payable with reference to book profits, (iv) other provisions made for liabilities excluding ascertained liabilities, and (v) contingent liabilities
Comments The Final BBT Rules are introduced to give effect to statutory provision inserted in ITL effective from 1 June 2016. Accordingly, the Final BBT Rules are also made applicable w. e. f. 1 June 2016. Any impact of the Final BBT Rules on buy-back effected after 1 June 2016 will need to be evaluated. In addition to the guidance provided under the Draft BBT Rules, the Final BBT Rules deal with the circumstances involving buy-back of shares issued upon conversion of preference shares, shares issued pursuant to corporatization of firm/proprietary concern and shares issued as a part consideration for acquisition of asset or settlement of liability.
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