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How Essar, Rosneft are trying to avoid Vodafone’s tax fate

Both sides involved in the $12.9-billion (₹86,400-crore) Essar Oil sale to the consortium of Rosneft, Trafigura and United Capital Partners are working overtime to avoid a Vodafone-like retrospective tax demand, according to sources involved in the negotiations.

business Updated: Oct 17, 2016 10:37 IST
Ramsurya Mamidenna and Suchetana Ray
Ramsurya Mamidenna and Suchetana Ray
Hindustan Times
An oil refinery of Essar Oil, which runs India's second biggest private sector refinery, is pictured in Vadinar in Gujarat.
An oil refinery of Essar Oil, which runs India's second biggest private sector refinery, is pictured in Vadinar in Gujarat.(REUTERS)
         

Both sides involved in the $12.9-billion (₹86,400-crore) Essar Oil sale to the consortium of Rosneft, Trafigura and United Capital Partners are working overtime to avoid a Vodafone-like retrospective tax demand, according to sources involved in the negotiations.

On October 15, Essar Energy Holdings and Oil Bidco (Mauritius), both incorporated in Mauritius and are the controlling shareholders in Essar Oil, signed the agreement to sell 98% of Essar Oil to the Rosneft-led consortium.

According to people involved in the negotiations, Rosneft has been insisting on a concrete undertaking from the Ruias that it would not get a tax demand later. “Whichever way you look at it, it is a zero-tax deal,” one source told HT, adding that they are working on tax calculations and structuring.

The Essar Group has initiated efforts to obtain ‘nil-tax certificate’ from the tax department, people aware of the development said.Essar Group refused to comment for this story.

Section 197 of the Income Tax Act provides for a so-called nil certificate for either zero TDS (tax deducted at source) or tax deducted at a lower rate. The Income tax department has been reluctant in issuing nil certificates. To avail of this benefit, the assessee whose TDS is likely to be deducted should make an application before the TDS Assessing Officer.

Contacted by HT, sources at the tax department said they are yet to hear from either company on the issue of tax.

“Let them first get the regulatory approval, we will look at it after that,” they said.

The India-Mauritius double taxation avoidance agreement was amended in May this year to avoid any ‘misuse’, as unaccounted money from these tax havens had started coming back into India, especially into real estate and the stock market, in what is popularly called ‘round-tripping’ of funds.

Under the amended tax treaty with Mauritius, capital gains tax will be levied only on sale of shares of an Indian resident company, if the sale happens after March 31, 2017.

Capital gains tax would have been levied at a lower rate of 20%, compared to 30% tax levied on business income.

“Since the Essar group holding companies are entities registered in Mauritius, they can avail of this ‘grandfather’ clause in the amended treaty,” said another source in the tax department.

India and Mauritius had signed a protocol for amendment of the convention for avoidance of double taxation on May 10, where it was explicitly mentioned that the existing exemptions would continue till March 31 next year.

Tax levies on sale of shares of companies that are based in India have generated much attention after the Indian tax department lost a $2.5 billion tax claim on the 2007 transaction involving Vodafone’s acquisition of 67% stake in mobile phone operator Hutchison Essar in India, for $11.5 billion.

First Published: Oct 17, 2016 06:04 IST

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