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CBDT reopens 400 PE, M&A deals
December, 13th 2007
The spill-over effect of Vodafones battle with Indian tax authorities may prove costly for several other deal makers. The Central Board of Direct Taxes (CBDT) has reopened about 400 cases of big and mid-sized transactions that took place during the past six to seven years.

According to sources close to the development, the cases include foreign corporates and PE firms selling stakes of companies based in India, and not paying any capital gains tax.

One of the first such cases that the tax department is currently probing is Montreal-based Alcan Incs selling of the controlling stake in Indian Aluminium Company (Indal) to Hindalco Industries seven years ago, sources in the finance ministry said.

Significantly, there were around 300 PE deals clocked in India in 2006 alone. The tax department had earlier slapped a notice on Vodafone Essar, demanding $2 billion as capital gains tax over its $1-billion acquisition of a majority stake in Hutchison Essar, Indias fourth largest mobile telephone company. The case is now locked in the Bombay High Court.

When contacted, CBDT chairman R Prasad confirmed that the department had reopened many more cases similar to that of Vodafone, but refused to name the deals under the scanner.

We have found that there are many cases where foreign companies or PE firms sell their stakes of an Indian company. Many large transactions do take place in India, but we receive no tax at all. We have reopened all such cases that took place in the last six to seven years, Mr Prasad said.

Finance ministry sources say that the revenue department would not like to single out Vodafone, when there has been many large and mid-sized transactions in the country, involving foreign companies, where the tax department received no capital gains tax.

KPMGs executive director Vikram Utamsingh, specialising on M&A deals, argues that companies doing transactions through tax havens like Mauritius, should escape such a scrutiny.

In most cases, a foreign company invests in India through a Mauritius-based holding company. The seller does not sell the share of the Indian company, but those of the parent entity based in Mauritius. You cant ask for taxes then, he says.
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