BUY BACK DISTRIBUTION TAX

[Mr. M. GOVINDARAJAN]

Introduction

Under the Income-tax Act, 1961, dividend distributed by a company is subject to Dividend Distribution Tax under Section 115-O while buy-back of shares is taxable in the hands of shareholders under section 46A. However, when the shareholders were located in jurisdictions where capital gains was exempt, no tax was payable on buy-back of shares. It was found that several companies resorted to this alternative as a part of tax avoidance mechanism and resorted to buy-back of shares instead of distributing dividends. Consequently, neither the company nor the shareholders paid any tax.

Tax on distributed income

Section 31 of Finance Act, 2013 proposed to insert Chapter XII-DA after the Chapter XII, providing special provisions relating to tax distributed income of domestic company for buy back of shares.

Section 115QA (1) of the Act provides that an unlisted company, notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of its total income for any assessment year, any amount of distributed income by the company on buy-back of shares from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of 20% on the distributed income.

Explanation (i) to this section defines the term ‘buy back’ as purchase by a company of its own shares in accordance with the provisions of any law for the time being in force relating to companies.  Explanation (ii) defines the term ‘distributed income’ as the 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.

Addition to normal tax

Section 115QA(2)  provides that even though the said unlisted company is not liable to pay income tax for any assessment year, the company is liable to pay tax on the distributed income on buy back of shares.

Liability to pay tax

Section 115QA(3) provides that the principal officer of the said company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares.  Section 115QA(5) provides that no deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon.

No credit allowed

Section 115QA(4) provides that the tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit there for shall be claimed by the company or by any other person in respect of the amount of tax so paid.

Interest for nonpayment of tax

Section 115QB provides that where the principal officer of the said company and the company fails to pay the whole or any part of the tax on the distributed income referred to in subsection (1) of section 115QA, within fourteen days,  he or it shall be liable to pay simple interest at the rate of 1%  for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

Assessee in default

Section 115QC provides that if any principal officer of a domestic company and the company does not pay tax on distributed income in accordance with the provisions of section 115QA, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income-tax shall apply.

Determination of tax

The unlisted companies resorting to buy back of shares were kept in dark on the manner in which the 20% of buy back distribution tax is to be computed on such transactions.  Post the Budget 2016-17 move to expand the coverage of buy back distribution tax to wider situations of buy back of shares.  The CBDT has now issued draft rules spelling out the manner in which the distributed income be computed for this purpose vide Notification dated 25.07.2016.  The CBDT offers the comments of the stakeholders on the draft rules by 31^st July 2016 electronically. 

The draft rules provides the following-

1. Where the share has been issued by a company on its subscription by any person, the paid up amount actually received by the company in respect of such share including any amount actually received by way of premium shall be the amount received by the company for issue of the share.
2. 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 the amount as reduced by the sum so returned shall be the amount received by the company for issue of the share.
3. Where the share has been issued by a company being an amalgamated company, under a scheme of amalgamation, in lieu of the share or shares of an amalgamating company, then, the amount received by the amalgamating company in respect of such share or shares determined in accordance with this rule, shall be deemed to be the amount received by the amalgamated company in respect of the share so issued by it.
4. The amount received by a company, being a resulting company in respect of shares issued by it under a scheme of demerger shall be the amount which bears to the amount received by the demerged company in respect of the original shares determined in accordance with this rule the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger;
5. The amount received by the demerged company in respect of the original shares in the demerged company shall be deemed to have been reduced by the amount as so arrived at under sub-rule (4);
6. Where the share has been issued or allotted, without any consideration, on the basis of existing shareholding in the company, the consideration in respect of such share shall be deemed to be Nil;
7. The amount received by a company in respect of any share issued by it on conversion of bond or debenture, debenture-stock or deposit certificate in any form, issued by it shall be that part of the amount received by the company in respect of the instrument as is so converted;
8. In any other case the face value of the share shall be deemed to be the amount received by the company for issue of the share.

The draft rule conceptualizes seven different circumstances for determination of consideration for issue of shares.  The tax experts indicated that the draft rules should address the concerns of the tax payers.  They further noted that certain situations such as buy back of shares issued as ESOPs or sweat equity shares need to be addressed.

The draft rule finalized by the Department after into consideration of the comments, suggestions of the stakeholders received up to 31.07.2016.