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Capital gains tax on Hutch-like deals
April, 03rd 2007

The I-T department, which believes that Hutch-Vodafone deal falls under the capital gains tax ambit in India, may scrutinise similar transactions.

Transfer of beneficial interest of any asset in the country was liable to capital gains tax, a department source said. The source said Hutchison and Vodafone have sought approval from the Indian authorities, including Foreign Investment Promotion Board (FIPB), as the asset is in the country. The department thinks this would hold true for all transactions where the asset is located here, hence the move to examine such deals.

According to Section 911 of the Income-Tax Act, if any property located in the country is transferred, it would attract capital gains tax. The section does not provide for an exemption. However, sources familiar with the Hutch-Vodafone transaction denied the I-T departments claims. They point out that the transaction involves sale of Mauritius-based companies, which control a 67% interest in Hutch-Essar, the Indian entity. Thus, the provisions of the double-taxation treaty clearly hold.

Incidentally, when GE partially divested its stake in Genpact (then Gecis) to a clutch of private equity funds, it did not pay capital gains tax. The transaction too involved Mauritius-based entities. The I-T department recently shot off a letter to Hutchison Essar asking it to impress upon Hutch Telecom International to pay $1.9 billion by way of capital gains.

...it has come to our knowledge that HTIL has made substantial gains from their investment in Hutchison Essar. You are requested to impress upon HTIL to discharge their tax liabilities on the gains made.

Your attention is directed to Section 195 of the Income-Tax Act that casts an obligation on a person responsible for paying any sum which is chargeable to tax in India to a foreign company to deduct income tax at source at the time of payment credit. Thus, both the payer and the payee are required to discharge their obligations/liabilities as provided in the Income-Tax Act.

Your stand that you are not in a position to submit requisite details since you are not a party to the transaction is not correct since the shares of your company are being sold and you can provide the information from the parties concerned, it said.

Hutchison recently sold its majority holding in Hutch-Essar to Britains Vodafone in a deal valued at $18.8 billion. The capital gains tax is imposed at 20%. As the company is not listed, there would be no long-term capital gains tax exemption, in the I-T departments view.

 
 
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