As corporate India unlocks value through mega deals, the Union government is smiling all the way to the bank.
The government is likely to earn Rs 7,000 crore (Rs 70 billion) tax in the current financial year through just Vodafone-Essar, Vedanta-Cairn and Hero Honda deals.
If the Vodafone case - in which the government has sought to levy a capital gains tax on Vodafone for buying Hutchison's stake in its venture with Essar - goes in the government's favour, the amount collected will be over Rs 19,000 crore (190 billion).
This will partially make good the loss of revenue on account of recent petroleum duty cuts.
Though the Supreme Court is expected to hear the plea of Vodafone against imposition of withholding tax on its $10.9-billion deal on July 19, the government is not complaining, as some companies have already paid capital gains tax on their acquisitions.
Vodafone recently agreed to pay $880 million (Rs 3,960 crore) as tax on purchase of Essar's stake in their joint venture, Vodafone Essar.
"It was prudent to pay withholding tax, even though we do not believe there should be any tax liability on this transaction as it falls under the Indo-Mauritian tax treaty," Vodafone spokesperson Ben Padovan said in an email response.
Besides, Vedanta will pay withholding tax to the tune of $600 million (Rs 2,700 crore) of the $6 billion that it will pay Cairn Energy for a 40 per cent stake in Cairn India.
Honda's exit from Hero Honda in a $851-million deal also helped swell government coffers.
"Hero has paid some Rs 100 crore (Rs 1 billion) in March and another Rs 711 crore (Rs 7.11 billion) in the current financial year at the highest rate of 20 per cent," said a government official. A query to the Hero Group remained unanswered.Broadly, the tax rate for cross-border deals is 10-20 per cent, plus surcharge and education cess.
Finance ministry officials said they were scrutinising many deals, but the actual tax liability would depend on many factors, including the kind of payment (royalty, interest, stake sale) and the Double Tax Avoidance Agreement with the country where the foreign company was based.
Ajay Kumar, executive director, PwC, said a clear picture of how much was added to the government's kitty would emerge only by the year-end.
"Some companies may claim tax refunds while filing returns, while some may apply for tax benefits under tax treaties," he said.
Though Vodafone has maintained that it did not need to withhold tax when it acquired Hutchison's stake, it has set aside $2.5 billion in an escrow account in case the court rules against it.
"The Hutch case is very different from the Essar transaction, both legally and factually," said Vodafone's Padovan.
He said there was no tax due on the Hutch-Vodafone transaction as no capital asset situated in India was transferred and the transaction was between non-residents.
"Almost every other country in the world will not seek to tax such a transaction. The stance of the Indian tax authorities goes against many years of established international taxation principles designed to encourage trade and investment."
Controversies arise because tax laws in this direction are still evolving. Gokul Chaudhri, partner, BMR Advisors, said disputes arose because there was no explicit rule related to taxation of these deals, unlike in China, where a circular in 2008 cleared the way for source-based taxation.
"The emerging economies are trying to protect their tax base through source-based taxation while developed countries have residency-based tax rules," he said. The Supreme Court judgment will set a precedent.
The gains from these deals are not taken into account when the government fixes its revenue targets.
The revenue department is also looking into New Cingular Wireless Services' deal with AT&T Mauritius for Idea Cellular.
In 2005, AT&T sold a 16.5 per cent stake in Idea Cellular to the Tata Group for $150 million (Rs 675 crore).
Transfer of stake in GE Capital International Services/Genpact India will also be examined. In 2004, GE sold 60 per cent in Genpact to General Atlantic and Oak Hill Partners for $500 million (Rs 2,250 crore).
Sanofi Pasteur Holding's deal with Merieux Alliance, Groupe Industriel Marcel Dassault's deal for acquiring Shantha Biotechnics Ltd and SKR BPO Services Private ltd's deal with Barclays Mauritius Ltd for acquiring Intelnet Global Services Private Ltd are also being examined.
In 2009 Sanofi Aventis had bought a majority stake in Shantha Biotech for $770 million.