Govt likely to get tax bonanza under Mistry exit plan, say experts

Shapoorji Pallonji (SP) Group will have to pay hefty tax to the government under its latest proposal for an exit from Tata Sons. 

Tax experts said under the current provisions of tax laws applicable to capital reduction, the recipient (SP Group) would be chargeable to deemed dividend (to the extent of the distributing company’s free reserves) and in relation to the fair value of assets over and above such free reserves, there would be capital gains tax to be paid to the government.

Tata Sons had free reserves of Rs 45,545 crore as of March this year and the Mistrys have valued their 18.4-per cent stake at Rs 1.78 trillion.

A legal source said the Mistrys would have to sell shares in listed Tata companies to pay the tax (if Tata Group agrees to the Mistry plan) and lower their stakes in them.

Last week, the Mistrys filed their settlement terms with the Supreme Court (SC) and sought direct stakes in all the listed Tata entities, including a 13.22 per cent direct stake in the group’s crown jewel, Tata Consultancy Services, worth Rs 1.35 trillion, and a pro-rata share of the Tata brand.

It also asked for a neutral third-party valuation for all the unlisted assets adjusted for net debt.

“Tax issues would depend on the methodology of the payment, such as payment in cash against payment in kind or a combination of both,” said Ketan Dalal, managing partner, Katalyst Advisors LLP, a tax advisory firm.

“As a general concept, capital reduction could be either across the board or selective... In a situation like this, presumably selective capital reduction with payment in cash, or in kind (say, shares), or a combination, seems to be on the table,” said Dalal.

“Such capital reduction would be an NCLT (National Company Law Tribunal) process under the Companies Act. In so far as tax is concerned, under the general provisions of tax laws applicable to capital reduction, the recipient would be chargeable to deemed dividend (to the extent of the distributing company’s free reserves) and in relation to the fair value of assets over and above such free reserves, there would be capital gains. This seems unfair because there is no monetisation at that stage,” he said.

Incidentally, regarding valuation, a holding company discount should logically not apply in a strategic transaction for the Tatas because they will get rid of a warring equity holder and full control over the Tata empire.

The Mistrys have said the pro-rata share of brand value adjusted for net debt (i.e., debt less cash and cash equivalents) can be settled in cash and/or in listed securities. For the unlisted companies, an expedited valuation can be done with a valuer selected by both sides, it said.

The Tata brand was valued at $20 billion in accordance with its last valuation and the Mistrys have sought a pro-rata share of the brand value.

The Mistry group said the “quicker to implement” settlement was a win-win deal for both sides.

The Tatas have told the SC they are willing to buy out the Mistrys, but they have not responded to their latest settlement offer.

Insiders say they will respond in court.