The $8.48 billion deal between mining major Vedanta and Cairn Energy may open a pandora?s box for both the companies with a possible tax liability that the income tax sleuths are investigating.
The finance ministry will be looking into the share purchase deal that could attract a capital gains tax on the profits on sale of shares of Cairn as well as a tax on the non-compete fee that is being paid under the deal.
UK-based Cairn Energy would sell 51% stake in Cairn India to Vedanta Resources for $8.48 billion that would be done through a share purchase by Vedanta in Cairn India from its holding company Cairn Energy Plc and also through an open offer.
?The profits on share sale will attract a capital gains tax depending on the duration of share holding.
?The difference would have to go under an indexation and then a capital gains tax will be levied,? a finance ministry official told FE.
There would also be a tax levied on the non-compete fees that is paid to the promoters of the company to deal with any competition in future. As part of the deal, the promoters of Cairn will get non-compete fees of Rs 6,000 crore.
When asked about the quantum of tax that could come to the tax government kitty, the official said, ?it is early to assess that as the structure of the deal is still being finalised.?
The finance ministry feels that the case could open up complexities and may also give rise to litigations like those in Vodafone-Essar deal and many others as the acquirer (Vedanta) and the company selling its controlling are both outside India but the target company being acquired is in India. So, that may lead to a confusion over the liability.
Keeping in view the position taken by the tax department in similar deals, Cairn will have to pay a tax on the capital gains on the profits through share sale.
For this, Vedanta will have to keep a withholding tax while making the payments.