The tax department has objected to Vodafones demerger of towers to Vodafone Essar Infrastructure contending it is the first step in an alleged tax avoidance arrangement prior to this entitys amalgamation into Indus Towers, which also holds the towers of Bharti and Idea for common use. Tower sharing is encouraged by the government to keep costs low for making cellular telephony available in rural areas. Vodafone, Bharti and Idea own Indus in the ratio of 42:42:16.
The tax departments claim that the scheme was meant to evade R3,500 crore of income tax and other state-level levies including R600-crore stamp duty, was first endorsed by a company law judge but was overturned by the Gujarat High Court in favour of Vodafone. The tax authoritys appeal is now being heard in the Supreme Court. Experts said that usually, any court order in a tax matter will apply only to the taxpayer concerned for the years specified, but any decision by the Supreme Court favouring the tax department, would have wider implications.
The apex courts ruling becomes the law of the land and it would, in principle, apply to any tax payer in identical facts and circumstances. However, for the income tax department to make a tax demand, it will have to initiate separate proceedings, said Neeru Ahuja, partner, Deloitte.
When contacted, a spokesperson for Bharti Airtel declined to comment on the issue that is sub-judice. Idea Cellular could not immediately respond to a query emailed on Thursday. Idea Cellular got Gujarat High courts approval for demerging towers to Idea Cellular Towers Infrastructure in August 2009. Ernst & Young tax partner Pranav Satya said the apex court decision could impact other companies too depending on the way the judgment is passed.
Any tax demand on Idea and Airtel by the department would depend on its assessment of the market valuation of the assets transferred and the capital gains on that. Since employees and other liabilities such as interest cost have not been transferred to the respective tower companies, the department may also deny any deduction of such expenses claimed by the parent company.
Interestingly, the tax authorities responded to a customary newspaper announcement of the demerger scheme of only Vodafone while Bharti Airtel and Idea Cellular got their schemes sanctioned without any objection from the tax officers. Vodafone had cited various judgments that sanctioned such demerger schemes, while leaving tax issues open, suggesting that a tax claim is no ground for barring a demerger of infrastructure assets aimed at better efficiency and lower operational costs.
The department held that the scheme led to avoidance of stamp duty of Rs 600 crore, assuming the market value of the assets demerged at Rs 15,000 crore. Vodafone denied allegation that the demerger was a tax avoidance subterfuge. It also denied the charge that transferring assets at book value helped in avoiding capital gains tax.