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Taxing times ahead for Ranbaxy- Daiichi deal?
June, 12th 2008

The pharmaceutical poster boy Malvinder Mohan Singh, who will continue as CEO and managing director of the entity, has not only attracted media attention with his billion dollar Daiichi deal but he has also invited attention from the taxman as well.

NDTV has learnt from the income tax department sources that the IT department will examine the Ranbaxy deal to examine if capital gains tax should be levied.

Under Indian tax laws, when shares exchange hands, the difference between the acquisition price and the sell price, is subjected to capital gains.

The income tax department will have to examine whether this transaction will fall under short term or long term capital gains.

The deal is the largest transaction involving a listed Indian entity, so it is natural that India's taxmen will be interested parties especially when the FM himself is asking his department to ramp up tax collections.

Tax experts say the law is also very clear on the matter, as they say if shares are sold on the floor of the stock exchange then only the STT is levied. The long-term capital gains are completely exempt.

But if the deal is transacted outside the exchange then there is a long term capital gains tax at the rate of 10 per cent.

Also in case the promoters have bought any shares during the last 12 months then only on the capital gains arising out of those particular shares, tax can be levied at the maximum marginal rate of 33.9 per cent.

In a back of the envelope calculation, Ranbaxy gets roughly Rs 10,000 crore for selling 13 crore shares. The net capital gains for the company works to a broad estimate of Rs 9935 crore.

A 10 per cent long-term capital gains tax, and a 10 per cent surcharge, plus a 3 per cent cess could mean a capital gains tax payout of over Rs 1100 crore.

''It also needs to be seen whether the promoters held these shares directly or through holding companies situated outside India. For shares sold through holding companies abroad there will be no capital gains tax, as they will attract the provisions of the Double Taxation Avoidance Agreement, which could lower the tax liability on the Ranbaxy deal,'' said Amit Jain, BMR & Advisors.

This is now the moot question. In fact, the most ticklish aspect of the deal something in which the income tax department will take very active interest after getting dragged into long litigation in the Vodafone deal.

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