Tax impact of Reliance Inds divestment of RPL shares
November, 29th 2007
Is there a tax implication in the $1 billion-lift that Reliance Industries Ltd (RIL) gained by divesting its 4 per cent stake in Reliance Petroleum Ltd (RPL)? Nil, says Mr V.K. Subramani, a practising chartered accountant and a tax expert.
As reported, RIL sold 18.04-crore equity shares held by it in RPL for a consideration of Rs 4,023 crore. Subtracting the cost of acquisition of Rs 360.80 crore (at Rs 20 per share), long-term capital gain amounts to Rs 3,662.20 crore.
Long term, because the shares were held by RIL for more than 12 months, explains Mr Subramani, in an e-mail interaction with Business Line, from his Erode office, interpreting the provisions of the Income-Tax Act, 1961 in the context of the Reliance transaction.
Since the shares have been sold through stock exchange in India and subjected to the Securities Transaction Tax, the long-term capital gain is eligible for complete tax exemption under Section 10(38), he adds.
A caveat, though, is that the long-term capital gain becomes liable to tax if the company pays tax on book profits dealt with in Section 115JB of the Act.
He refers to the Proviso to Section 10(38) inserted by the Finance Act, 2006, which provides for inclusion of long-term capital gain from shares (and units of equity oriented fund), while computing book profit under Section 115JB. An amendment that is applicable from assessment year 2007-2008 onwards.
Thus, if the income tax on RILs income computed as per the normal provisions of the Act is more than the income tax computed based on certain adjustments given in Section 115JB, no tax is payable on this long-term capital gain, elaborates Mr Subramani.
On the contrary, if the income tax on RILs income as per regular provisions is less than the tax computed under Section 115JB adjustments, the gain would suffer tax at 15 per cent plus surcharge and cess.
Whether the actual tax paid by RIL in the recent past was on regular income or book profit under Sec 115JB cannot be ascertained, he observes. For, this is not usually disclosed in the annual reports.
That apart, the transaction highlights the deft use of market buoyancy to offload a small fraction of holdings to have tax-free income, he opines.
The deal poses no tax implication to RPL as the company did not payout anything from its coffers.