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Income Tax may slap huge tax bills on Hero, Honda
March, 09th 2011

Japanese auto major Honda could end up paying Rs 791 crore as capital gains tax, including the education cess, in the deal to divest its 26% holding in Hero Honda , a joint venture company with B M Munjal-led Hero Group.

Not only this, according to a senior tax official, the income tax department is also considering to raise a demand of Rs 1,248 crore on Hero Group for buying the stake at a hugely discounted price in an off-market deal.

Since Honda sold its stake off market, the capital gains that it earned by selling its stake will be taxed at 20%, which becomes 20.60% along with education cess.

According to a source who did not wish to be identified, out of the total consideration of Rs 3841.83 crore paid by Hero Group to buy 5.19 crore shares in the JV, most of the amount will qualify as capital gains.

He said that both the partners, Hero Group and Honda, made the initial investments at face value. Therefore, the total investments made by Honda to acquire Rs 5.19 crore share would amount to approximately Rs 10.38 crore. Honda officials could not be contacted for comment.

Interestingly, as Hero is buying the stake at less than 50% of the price prevailing in the market, the tax department is considering to levy taxes on the discount value, which accrued to Hero Group as profit. The market value of Hondas stake in the JV is Rs 7,882 crore.

But, it sold the stake to Hero Group for Rs 3,841.83 crore. Therefore, the difference, which is Rs 4,040.21 crore, the tax official said, would be treated as profit to Hero Group and will be taxed at 30.90% including the education cess. Therefore, the tax liability, if the departments will prevails, will be Rs 1,248 crore.

However, a senior tax expert, who did not want to be quoted said that there is no such provisions in the law under which the department can levy tax on the deference between the market value and the transaction value.

In the case of employee stock ownership plan (Esop), where tax is levied on the difference between the market value of the shares and the price at which it is given to the employees, the expert said there is clear provision for the same. But in this case, when one partner is selling stake in a company to its other partner, the tax can be levied on the realized amount only.

CAPITAL GAINS

Honda may have to pay Rs 791 cr as capital gains tax.

The I-T dept may also slap a demand of Rs 1,248 cr on Hero Group for buying Hondas stake at a hugely discounted price.

Since Hero is buying the stake at less than 50% of the market price, the tax dept may levy taxes on the discount value.

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