1. Essar Oil’s $13 bn stake sale to Rosneft, others may not attract capital gains tax

Essar Oil’s $13 bn stake sale to Rosneft, others may not attract capital gains tax

But the experts were sceptical about the tax department agreeing to issue a nil-tax certificate, reportedly sought by the company, under Section 197 of the Income Tax Act.

By: | New Delhi | Updated: October 18, 2016 7:19 AM
Essar Group would like to hand the Russian consortium the certificate to convince that the deal would not impose on it any TDS (withholding tax) obligation.  (Reuters) Essar Group would like to hand the Russian consortium the certificate to convince that the deal would not impose on it any TDS (withholding tax) obligation. (Reuters)

Essar Oil’s proposed sale of 98% interest in its Vadinar refinery and retail assets to a consortium led by Russia’s Rosneft via two Mauritius entities which have controlling stake in the Indian company, might not attract any capital gains tax in India, tax experts said, citing the possibility of the Essar Group resorting to the India-Mauritius tax treaty.

But the experts were sceptical about the tax department agreeing to issue a nil-tax certificate, reportedly sought by the company, under Section 197 of the Income Tax Act.

Essar Group would like to hand the Russian consortium the certificate to convince that the deal would not impose on it any TDS (withholding tax) obligation. The tax department, as a means of abundant caution, usually doesn’t issue such certificates in case of large deals like this, as it could preempt any future tax actions, if circumstances warrant them, they added.

However, since the deal in question was anchored at the level of the top political leaderships in the two countries, the tax department might have been kept in the loop, some analysts observed.

India doesn’t levy long-term capital gains tax on share transfers (stocks held for more than twelve months) if the deal is executed via exchanges, and the effective tax on a private deal, where a non-resident is the seller and therefore the taxable entity, is 11%. The country’s short-term capital gains tax with respect to non-resident is 42%. Essar-Rosneft deal would be executed outside the stock exchange route but would practically be exempt from tax thanks to the bilateral treaty, which says the parties concerned (Essar Energy Holdings and Oil Bidco in this case) are “taxable only in the country of residence” — in this case, Mauritius, where the tax rate is zero.

As Essar Oil spokesperson said: “The parties have signed and announced the execution of share purchase agreement and the closing of the transaction is conditional upon receiving requisite regulatory approvals and satisfaction of other customary conditions. The tax implications would get determined, only upon completion of the transaction later this year, in accordance with the tax laws in India.”

Tax experts added that there was no parallel between Essar Oil-Rosneft deal and the Vodafone case, which was about taxation of indirect transfer of Indian assets. Here, Indian assets have been directly taken over by a non-resident entity.

According to the recent amendment to the India-Mauritius tax treaty, New Delhi can tax capital gains of investors from the island country if it arose from sale of shares of an Indian resident firm acquired after April 1, 2017. However, grandfathering clause is provided in relation to shares acquired before April 1, 2017 and a two-year (April 1, 2017, to March 31, 2019) transitional phase is provided when the tax rates will be half India’s domestic rates. Since the Essar-Rosneft deal in question was clearly about sale of shares purchased before the sunset date, the treaty benefit (virtual exemption) is fully available.

Analysts said if Essar could convince the tax authorities that the deal has resulted in losses, it could strengthen its plea for issuance of the nil-tax certificate.

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