MUMBAI: The Rosneft-led group that’s taking over Essar OilBSE -0.15 % in a $13 billion deal has asked the Ruias, who’re selling their stake, to get an undertaking from the government that the transaction won’t face withholding tax, said people with knowledge of the matter. Mindful of the prolonged tax feud between Vodafone and the Indian government over its purchase of telecom assets, Essar Oil’s acquirers don’t want to be saddled with a similar demand, the people said.
The company denied it had sought any such certificate. Essar sought withholding tax exemption from the Mumbai tax department about two weeks ago, even before the deal was announced on October 15, said the persons cited above. The application was made to the international taxation team, said one of them.
“Essar Oil has applied for a no-deduction certificate (and) they are seeking benefit under the Mauritius (double-taxation) treaty,” a tax official told ET. “Since the transaction involves sale of shares of an Indian company, it is taxable in India.”
Under the accord, such a deal would be liable to tax in only one jurisdiction— Mauritius in this case, as Essar Oil is domiciled there–until March 2017, the official said.
Changes recently made to the treaty aimed at plugging loopholes will go into effect on April 1. The tax department is expected to make a decision on the matter in the next four weeks, experts said. Essar denied that any such request had been made.
“No application has been made to the Income tax department in connection with the proposed deal,” a spokesperson told ET. “The parties have announced the execution of share purchase agreement and the completion of the transaction is conditional upon receiving requisite regulatory approvals and satisfaction of other customary conditions. The tax aspects would be dealt with in accordance with the tax laws in India upon completion of the transaction which is expected later this year.”
The Ruias are selling a 98 per cent stake in Essar Oil along with a port at Vadinar in Gujarat to a consortium led by Russian oil company Rosneft, it was announced on Saturday. Rosneft will get a 49 per cent stake and Netherlands-based Trafigura Group and Russian investment fund United Capital Partners the remaining 49 per cent.
The tax department will scrutinise the deal before issuing a certificate, experts said. It may also look at the manner in which the Vadinar port sale was clubbed with the Essar Oil deal, they added. “Any foreign company that derives capital gains from the disposal of shares in an Indian company under Section 195 or Section 197 of the Income Tax Act has to determine withholding on the gain,” said one expert. “The withholding tax could range from 10 per cent for long-term capital gains to 40 per cent for short-term capital gains, but in this case there are a lot of complexities, even though the seller (Essar Oil) is a Mauritius company.”
The tax department could be caught in a bind over the matter, since it doesn’t want to be cast in the role of deal spoiler. “For the tax department this could be a tough decision to take because if they deny the certificate there would definitely be litigation and it would create negative business sentiments,” said a senior lawyer close to the development. “On the other hand, if they give a go-ahead, they could face problems in the future, as someone may just stand up and say there was a revenue loss for the tax department.”
Ownership structure is among the things officials may want to take a closer look at, said a lawyer. “What could create complications could be the way Essar ownership structures are, with the holding entity registered at one place outside outside India, which holds Essar Oil through a Mauritius entity,” the person said. “There could be some problems if the department chooses to scrutinise the complex holding structures of Essar.”