Japanese buyer to withhold tax in Max Life deal

Move a fallback of Hutch-type reading of the rules by govt in India, says it should not be under the ambit

In an after-effect of the Vodafone tax case, MS&AD Insurance Group of Japan will withhold tax while buying 26 per cent stake in Max New York Life Insurance for Rs 2,731 crore.

New York Life Insurance Company would make the capital gains. It said these should not be subject to tax in India, as it held the shares in the life insurance joint venture with Max India through a holding company in Mauritius. However, it has allowed the Japanese company to withhold the tax as a precaution and would file for a refund with the tax department later.

“The buyer is withholding tax on this transaction. There are complicated tax issues involved here (in India). We are going to pay 35 per cent tax in the US on our capital gain in this tax and we will get credit for tax we pay anywhere else. Our share in Max New York Life is through a Mauritius holding company and as per the India-Mauritius tax treaty, we do not believe there will be a tax payable in India,” said Michael Sproule, executive vice-president and chief financial officer of New York Life.

The buyer, MS&AD, may have to withhold tax at 21 per cent of the capital gains made by New York Life. The latter is selling 16.63 per cent holding to MS&AD and the remaining 9.37 per cent to Max India for Rs 182 crore. MS&AD will buy the 9.37 per cent from Max India for Rs 984 crore.

Vodafone’s acquisition of Hutchison’s stake in Hutch Essar in a $11-billion deal in 2007 got it a tax demand of Rs 11,000 crore here. After years of litigation, the Supreme Court ruled in favour of Vodafone this January. The apex court also turned down the review petition of the government. However, the government came up with retrospective amendments to the Income Tax Act, with effect from 1962, with a validation clause in the Budget, giving it powers to revive the demand.

Though the ultimate liability to pay the tax was on Hutch, the tax department said Vodafone should have withheld the tax in line with provisions of the Income Tax Act while making payment to the Hong-Kong based company. Just as with New York Life, the investment by Vodafone had also come from a tax haven.

The Budget proposals also allow the government to raise tax demands on transactions routed through Mauritius if the investor fails to prove the investment was not done primarily for tax benefit.