Experts and tax officials that Business Standard spoke with said the
deal was different from some past deals such as Cairn-Vedanta and
Vodafone-Hutch, as it involved a transaction of assets. Therefore, RIL
will have to pay corporation tax on its business income. They are,
however, divided on whether RIL would have to pay capital gains tax on
the deal.
“RIL is selling something and BP is buying something. So, it is not a
case of international taxation and BP will not have to pay any tax. RIL
is not selling a controlling interest, but only a share in their
blocks. RIL’s books of accounts will have to be seen to figure out if
there are any capital gains to RIL on giving BP a stake in those blocks.
Also, it will have to be seen whether these blocks are treated as
capital assets or something else,” said a finance ministry official, who
did not wish to be identified.
On Monday, BP had announced it would buy 30 per cent in 23 of RIL’s
oil & gas blocks, which including KG-D6 off the east coast. The two
also agreed to future performance payments of up to $1.8 billion and a
50:50 joint venture to source and market gas, which could take the total
investment to $20 billion.
RIL did not respond to an e-mail query on the matter. “This is an
asset deal and not a share transaction like Cairn-Vedanta. So, the
income will accrue to RIL, but the actual tax liability would depend
upon its corporate tax position (its losses). Besides that, there will
be capital gains tax of 20 per cent with indexation. So, the effective
tax liability may be just 20 per cent,” said Gokul Chaudhuri, a partner
with BMR Advisors.
Any exploration cost not written off for tax purposes provides an
offset in the computation. As regards the balance receipt, the asset,
having been held for over three years, is expected to qualify as long
term and, hence, attract concessional rate of capital gains tax.
A tax expert, on the other hand, said there would be no capital gains
tax in this case because the transaction is guided by a specific
provision under Section 42 (2) of the Income-Tax Act. “This is a farm-in
transaction for BP and farm-out for RIL. Whatever consideration is
received, the total exploration expenditure is reduced from that for tax
purposes. The remaining exploration cost is not allowed. It has already
claimed some expenditure,” said the tax expert.
In the past, the income-tax department has raised a tax demand in
several cross-border transactions. It has been involved in a legal
battle with Vodafone for its acquisition of Hong Kong’s Hutchison
Telecommunications stake in Hutch Essar for over $11 billion in 2007. It
is also examining various cross-border mergers & acquisitions,
including deals by Vodafone, Genpact, Barclays, Intelnet, Sanofi and
AT&T, to understand their tax implications.