Essar Vodafone split: Govt to pocket tax gain of Rs 1,700 crore

New Delhi: The Vodafone-Essar deal will lead to a tax collection of over Rs 1,700 crore, thanks to the double taxation avoidance treaty between India and Mauritius. In the absence of this treaty, the tax liability would have been around Rs 5,100 crore.

In case of Vodafone-Hutchison’s deal, the tax department had raised the demand on the entire transaction value of $11.1 billion. The holding companies of Vodafone India, which were sold and bought were based in Cayman Island with which India does not have sweeping double tax avoidance treaty. But, in the present deal, Essar is selling its Mauritius-based companies Essar Com Ltd and Essar Communication Ltd, which own 6.19% and 15.85% stake of Vodafone India to Vodafone Plc. The total deal size is $5 billion, including the 10.97% holding of Vodafone India, which is kept with Indiabased ETHL Communications Holdings Pvt Ltd (ETHL). Therefore, the transaction value for Mauritius-based companies is $ 3.33 billion. But as India has a double tax avoidance treaty with Mauritius, the entire deal will be tax exempt.

However, this facility will not be available for the sale of stake owned by ETHL Communications as it is based in India. The deal size for this is $1.67 billion or Rs 7,682 crore. As this is non-listed securities, a senior tax expert said that the capital gains tax will be levied at 22.66% of the profit. As Essar had invested Rs 45.43 crore to buy 4.54 crore share in the company , Essar will have a capital gains of Rs 7,637 crore. At the rate 22.66%, the tax liability will be around Rs 1,730 crore.