BG fears Vodafone-style capital gains nightmare

Vol 16, PW 8 (01 Nov 12) People & Policy
     

BG does not want Indian tax authorities following it around over ‘capital gains tax’ like the pug puppy in a popular Vodafone advert.

But BG’s sale of its 65.12% stake in Gujarat Gas to state-owned GSPC on October 3 opens the door to the kind of persecution fellow UK-based Vodafone underwent for five years after acquiring Indian telecom company Hutch Essar. “BG has good reason to worry,” says a tax expert, “given what happened to Vodafone.

” ‘Back of the envelope’ calculations put BG’s potential capital gains tax liability at Rs458cr or $85m. Yet this figure might vary because of an accounting practice called ‘indexation.

’ “It all depends on how tax officials interpret the sale,” we hear. “They can make or break you.

” Tax authorities pursued Vodafone for capital gains tax even though it was the buyer, as they claimed it should have withheld the right amount of tax from its payment to seller Hutchison Telecommunications. GSPC, similarly the buyer in the Gujarat Gas deal, is understandably concerned.

“We don’t want to get caught out,” says a senior GSPC source. “BG must get clarification from the income tax department so we can withhold the right tax; it’s their responsibility.

” Vodafone won a $2bn Supreme Court of India tax case on January 20 arguing that its acquisition of Hutch Essar involved share transfers outside Indian jurisdiction. In any other country this would be cause for celebration.

But the Indian government is playing spoilsport and proposing tax law changes to suit its own position backdated from April 1, 1962. Will BG get dragged into a similar taxation nightmare