Only Essar to pay tax on deal

Vodafone won’t face a tax burden on its $5-billion buy-out of Essar’s 33 per cent stake in the Indian joint venture, Vodafone Essar Ltd.

A senior income tax department official told Business Standard it was Essar which would have to pay capital gains tax, since the company would be gaining from this deal. “There would be no tax liability of Vodafone in this case,” he said.

"This is not a tax issue between two international companies, and since Essar is based in India, they would pay the capital gains tax,” said H P Ranina, senior corporate lawyer.

The I-T department official said the actual tax demand could only be ascertained when the details of the pay-out became known. He added that Vodafone’s decision to go for further investment in India clearly indicated the company wanted to tap the business potential and had taken into consideration the tax demands raised on their earlier investment.

The official said that after the Supreme Court’s direction, Vodafone had deposited Rs 2,500 crore in relation to the Rs 11,000 crore tax dispute and had also given a bank guarantee worth Rs 8,500 crore. Vodafone is fighting this tax bill in India over its 2007 purchase of Hutchison Whampoa Ltd's mobile business in the country.

The company has appealed to the Supreme Court, challenging a lower court order that Indian tax authorities had jurisdiction in cross-border deals. The income tax department asked Vodafone to pay Rs 11,218 crore but the British firm said it "strongly disagrees" with the calculation.

"The legal liability was on Vodafone for tax deduction at source because Hutchison is not a resident of the country. Hence, it asked them to deduct and pay tax. But since Essar resides in India, they will pay capital gains tax," said Sujjain Talwar, partner, Economic Laws Practice.