The completion of a proposed reverse merger between Cairn India Ltd and Vedanta Ltd could face a challenge from the tax department.
The central board of direct taxes (CBDT), a statutory body dealing with matters relating to levy and collection of direct taxes, on Tuesday said the department will continue to pursue a Rs.20,000 crore tax demand slapped onCairn India in March.

“I believe they will go for a court-appointed merger process. We are certainly keeping watch on it. We have a provisional attachment order. We will ensure that our position remains secure,” CBDT chairperson Anita Kapur said at a press conference in New Delhi.

Cairn India has come under the income-tax department’s scanner over a transfer of assets nine years ago. At the time, Cairn Energy Plc had transferred shares of Cairn India Holdings Ltd to Cairn India in 2006-07 before a proposed initial public offering (IPO) in India, resulting in a capital gain of about Rs.10,000 crore.
While the tax department slapped a tax demand of Rs.10,247 crore on Cairn Energy and froze its assets in India, a demand of Rs.20,495 crore was raised against Cairn India Ltd.

Cairn Energy sold its majority stake in Cairn India in 2011 to Anil Agarwal’sVedanta Resources Plc for $8.67 billion, leaving it with a minority holding of 9.82%. Vedanta, through a clutch of unlisted and listed subsidiaries, held a 59.9% stake in the oil explorer as of 31 March 2015.

Cairn India, in its notice to the stock exchanges in March, opposed the tax demand.

“Cairn India Ltd does not agree with this alleged demand and will pursue all possible options to protect its interest,” Cairn India said in its notice to the stock exchanges in March after the tax demand notice.

It approached the high-level committee (HLC) set up by the National Democratic Alliance government last year to look at fresh cases of retrospective tax demands. The firm was informed that its case was not eligible to be taken up by the HLC as the notice for the tax demand had been sent one year before the constitution of the committee, said CBDT’s Kapur.

Vedanta’s management remains confident that the tax demand will not be a serious hurdle for the deal. “We do not see the tax demand as a problem as post the merger the demand simply shifts to Vedanta Ltd from Cairn India” said D.D. Jalan, chief financial officer of Vedanta Ltd, said after the merger announcement
Some analysts and tax consultants think otherwise.

A 15 June report by international brokerage CLSA Ltd said that as per current Indian laws, the merger will need approval from a majority of the minority shareholders. With a 9.8% stake, Cairn Energy constitutes nearly one-fourth of the minority. The government has restricted it from selling its shares due to the ongoing tax dispute.
“Given large amounts involved, government may not allow conversion of Cairn’s shares into that of Vedanta, effectively disapproving the merger,” CLSA Ltd in a report released on 15 June.

A tax consultant, who has worked with several oil and gas companies in India and overseas, agreed. Considering the merger proposal will eventually come to the income-tax department, there are chances that the authorities may raise an objection and insist on the tax demand being met before the merger proceeds, the consultant said on condition of anonymity.