The Central Board of Direct Taxes (CBDT) has introduced new rule for computing amount received by a company in respect of issue of share for computing buy back tax payable. This new Rule 44BB is expected to address the issues relating to taxation of buybacks carried out by companies and thereby reduce litigation. The rules take effect from June 1, 2016 and it seeks to remove the limitations created by the restrictive meaning of buy back under the existing provisions.
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 rules have been finalized based on the stakeholders’ comments received to the draft rules issued by the CBDT in July this year. Previously, the draft rules provided that while determining the issue price of shares where the company had at any time, prior to the buy-back of the share, returned any sum out of the amount received in respect of such share such sum so returned should be reduced. The final rules also prescribe that no such reduction will be warranted if the sum so returned was chargeable to DDT (dividend distribution tax) in the first instance, which was paid by the company. 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.
