There will be capital gains tax of 20 per cent with indexation.
Reliance Industries (RIL) may have to pay 30 per cent tax on the income accruing to it from the $7.2-billion deal with British firm BP. However, BP — the world’s fourth-largest energy company — will not be liable to pay tax to the Indian government on the deal, as it does not involve the transfer of shares.
Experts and tax officials that Business Standard spoke with said the deal was different from some past deals such as Cairn-Vedanta and Vodafone-Hutch, as it involved a transaction of assets. Therefore, RIL will have to pay corporation tax on its business income. They are, however, divided on whether RIL would have to pay capital gains tax on the deal.
“RIL is selling something and BP is buying something. So, it is not a case of international taxation and BP will not have to pay any tax. RIL is not selling a controlling interest, but only a share in their blocks. RIL’s books of accounts will have to be seen to figure out if there are any capital gains to RIL on giving BP a stake in those blocks. Also, it will have to be seen whether these blocks are treated as capital assets or something else,” said a finance ministry official, who did not wish to be identified.
On Monday, BP had announced it would buy 30 per cent in 23 of RIL’s oil & gas blocks, which including KG-D6 off the east coast. The two also agreed to future performance payments of up to $1.8 billion and a 50:50 joint venture to source and market gas, which could take the total investment to $20 billion.
RIL did not respond to an e-mail query on the matter. “This is an asset deal and not a share transaction like Cairn-Vedanta. So, the income will accrue to RIL, but the actual tax liability would depend upon its corporate tax position (its losses). Besides that, there will be capital gains tax of 20 per cent with indexation. So, the effective tax liability may be just 20 per cent,” said Gokul Chaudhuri, a partner with BMR Advisors.
Any exploration cost not written off for tax purposes provides an offset in the computation. As regards the balance receipt, the asset, having been held for over three years, is expected to qualify as long term and, hence, attract concessional rate of capital gains tax.
A tax expert, on the other hand, said there would be no capital gains tax in this case because the transaction is guided by a specific provision under Section 42 (2) of the Income-Tax Act. “This is a farm-in transaction for BP and farm-out for RIL. Whatever consideration is received, the total exploration expenditure is reduced from that for tax purposes. The remaining exploration cost is not allowed. It has already claimed some expenditure,” said the tax expert.
In the past, the income-tax department has raised a tax demand in several cross-border transactions. It has been involved in a legal battle with Vodafone for its acquisition of Hong Kong’s Hutchison Telecommunications stake in Hutch Essar for over $11 billion in 2007. It is also examining various cross-border mergers & acquisitions, including deals by Vodafone, Genpact, Barclays, Intelnet, Sanofi and AT&T, to understand their tax implications.