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Inbound M&A deals on I-T department's radar; total tax demand may exceed Rs 4,000 crore
October, 12th 2015

The tax department has fixed its eagle eye on yet another target — this time it's inbound mergers and acquisitions (M&As). Forty companies are said to have received notices and the total tax demand could exceed Rs 4,000 crore, according to estimates.

Income tax isn't levied on inbound foreign direct investment ( FDI) to encourage the inflow of overseas money. But the revenue department has cited Section 68 of the Income Tax Act, which deals with "unexplained cash credits," to impose a hefty 34 per cent levy on part of the transactions. While ETcould not confirm the total demand under this provision, it adds up to more than Rs 500 crore in two cases.

The 40 Indian companies that got the tax demand include Credit Suisse, Godrej Properties, Kohinoor Infrastructure and Carat Media, according to the documents that ET has seen. They are among at least eight that have filed writ petitions in the Bombay High Court.

The high court will hear the petitions jointly on October 19.

ET has copies of their petitions against the income tax department. The other companies among the eight are PMP Auto Components, an Ashok Piramal group company, Destimoney Enterprises and Finquest Financial Services. Names of other 32 companies could not be verified. Godrej Properties declined to comment, saying it was in its "silent" period. Credit Suisse declined to comment.

ET had first reported on the I-T department raising demands for unexplained tax credits on February 16.

Inbound M&A deals on I-T department's radar; total tax demand may exceed Rs 4,000 crore

The latest move comes as the Narendra Modi government has been pushing hard to change its image as a tax-aggressive jurisdiction to attract overseas investment. To this end, it has declined to challenge tax rulings that have gone in favour of companies besides easing norms on minimum alternate tax—moves that have gone down well with overseas investors.

INEXPLICABLE PREMIUMS

The reasoning behind the tax demand stems from what the department seems to construe as inexplicable premiums being paid by foreign buyers.

"The department suspects that these companies have provided some services to the foreign investors, and instead of payment the money is routed as capital investment to save tax. The department is also suspicious about the source of these investments," a person close to the development told ET.

Many real estate and infrastructure transactions at SPV (special purpose vehicle) level have also come under I-T scrutiny.

Foreign Exchange Management Act (FEMA) norms require unlisted Indian companies to get themselves valued by an independent chartered accountant. The company cannot sell shares at below this price, a rule aimed at ensuring that shareholders are protected. Paradoxically, the revenue department's attention has been drawn by overseas buyers paying significantly higher amounts than the valuation. The 34 per cent tax has been imposed on this 'premium.'

M&A tax experts question the revenue department's rationale.

"The quantum of premium at which the shares can be issued is a matter of commercial understanding between the parties and subject to exchange control regulations," said Punit Shah, partner, Dhruva Advisors. "Further, issue of shares and receipt of consideration is a capital account transaction... It would be highly inappropriate for the tax authorities to consider the valuation differences as taxable under Section 68 of the I-T Act, which essentially deals with unexplained credits via-a-vis source and nature of such credits."

Informally, many tax experts have started referring to the tax as an "inverse Vodafone tax." In that case, the I-T department had said the company had underreported its valuation.

 
 
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