Holcim likely to seek exemption under India-Mauritius tax agreement

Mauritius-based Holderind Investments, which holds a 63 per cent stake in Ambuja Cements, can claim capital gains exemption under the India-Mauritius tax treaty when it sells the stake in the Indian company in the coming weeks, according to tax experts.

Holcim is currently in talks with several Indian tax experts to ensure that its stake sale in Ambuja Cements does not get embroiled in a tax dispute like Vodafone of the UK when it acquired its India business from Hutchison and had to face litigation from the Indian tax department for over a decade. The talks with the tax department are important as buyers usually seek a no-objection certificate on withholding tax.

Tax experts said as Holcim’s stake in the Indian company is held prior to April 1, 2017, the treaty provides for grandfathering for pre-April 2017 holdings and investments, and allows tax exemption.

The Zurich-based cement major is expected to sell its Indian businesses for up to $6 billion in an auction in wh­ich India’s leading conglomerates, the Adani, JSW, and Aditya Birla groups are expected to participate.   

Holcim will use the proceeds to reduce its debt.

Tax tangle

• The India-Mauritius tax treaty offers capital gains exemption to Mauritian entities
• Holcim holds a 63% stake in Ambuja Cements via its Mauritius entity
• Holcim set to seek NOC from tax department before the stake sale; currently in talks with taxation experts

The buyer will have to invest an additional $4 billion to make open offers for both Ambuja Cements and its listed subsidiary, ACC. As on Friday, Holcim's stake in Ambuja was worth Rs 46,517 crore.

“Tax implications of a cross border sale (by Holcim) will depend on various factors, including the holding structure and the transaction structure. It seems that the Indian listed company (Ambuja Cement) is held through an Indian holdco which, in turn, is held by a Mauritius company. If the Mauritius company sells its stake in the Indian holding company, the Mauritius company should be able to claim capital gains exemption under the India-Mauritius tax treaty,” said Ketan Dalal, managing director of Katalyst Advisors, a leading tax advisory firm.

The India-Mauritius treaty was designed to attract foreign investments in the early 1990s when India’s foreign exchange reserves were alarmingly low. Subsequently, the Supreme Court held in favour of the assessee’s claim for such tax exemption. “Unfortunately, on the ground, litigation persists, although representations have been made for the CBDT to clarify expressly that such pre-2017 shares should be allowed exemption, as already provided in the treaty,” Dalal said. “Given the withholding tax obligations on the buyer in relation to payments to a non-resident seller, the tax department’s no-objection certificate is usually insisted on by the buyer, and getting such a certificate is often easier said than done,” Dalal said.

The sale of the Indian holding company may be a seller's preference but the buyer also needs to be comfortable with such a structure which is a matter of commercial negotiation. “If, for some reason, the sale is by an Indian company of shares in an Indian listed company, withholding tax should not apply, but the overall tax consequences on the seller could be adverse, both in terms of non-availability of the treaty protection and in terms of the cash trap in an IHC, with consequential dividend tax implications on cash extraction,” Dalal said.

The transaction will be one of the biggest M&A transactions in the Indian cement sector and the tax department will go through the deal with a microscope for any tax liability. “A lot of tax liability will depend on how the tax department looks at the structuring of the transaction,” said another tax lawyer.

"If Holcim acquired the shares before April 1, 2017, exemption under the India-Mauritius treaty may be available. However, taxes may still be imposed under the general anti-avoidance rules,” said Pranav Bhaskar, partner, SKV Law Offices.