The Central Board of Direct Taxes has suggested to the finance ministry that Hutchison Telecom International Ltd should first pay capital gains tax on the sale of its 52 per cent stake in Hutchison-Essar to Vodafone for $11.1 billion before the Foreign Investment Promotion Board clears the Vodafone acquisition.
Sources close to the developments said the tax authorities are of the view that the tax liability is on account of the capital gains arising from the sale of shares to Vodafone.
The stake has been transferred indirectly from HTIL, since it is routed through CGP Investment (Holdings) Ltd, which is incorporated in the Cayman Islands.
CGP's aggregate direct and indirect shareholding in Hutch Essar stands at 52 per cent.
In essence, the Hutch-Essar acquisition by Vodafone involves implications of capital gains arising from the transfer of shares of an overseas company from one non-resident to another.
Sources added that the tax authorities are of the view that Hutch-Essar Ltd is the permanent establishment for HTIL in India.
The tax liability is yet to be crystallised since the income tax department had asked Hutch-Essar to furnish details of the deal. These details are required to determine the overall capital gains demand.
The comments of the tax authorities were sent around 10 days back to FIPB, the sources added.
Sources said that even though the FIPB is not required to follow CBDT's suggestion, the tax department could pursue the tax implications even after the deal is through. A rough estimate puts the demand on account of capital gains in the range of $1-2 bn.
Earlier, the Mumbai income tax authorities had posed 33 questions to Hutchison-Essar Managing Director Asim Ghosh as part of the summons issued to him under Section 131 of the Income Tax Act, 1961.
The summons were issued on March 27, around the same time the department asked Hong Kong-based HTIL to pay capital gains tax on the sale of its holding in Hutchison Essar Ltd to Vodafone.
In New Delhi, the Hutch-Vodafone deal and its shareholding pattern were the focus of several meetings in the finance ministry today, with senior executives including Asim Ghosh and Max group Chairman Analjit Singh, collectively 12.26 per cent shareholders in Hutch-Essar, meeting with FIPB officials.
All stakeholders including HTIL and Essar executives will now meet Finance Secretary Ashok Jha tomorrow to clarify the structure of the deal.
Commerce Minister Kamal Nath and Communications and IT Minister Dayanidhi Maran also met Finance Minister P Chidambaram during the day and are understood to have discussed the matter.
Speaking to reporters afterwards, Nath said, "I have called a meeting with officials tomorrow and we will study the law ministry's comments on the issue". He, however, did not confirm whether the Hutch-Vodafone issue was discussed with Chidambaram.
Emerging from the meeting, Singh said, "There is no agreement to sell my shareholding to HTIL (now Vodafone) at a face value of Rs 10 per share. I am the sole owner of my stake in the company and I have decided to stay on."
Earlier during the day, Maran said that as far as his ministry was concerned, there had been no breach of licensing conditions either by Hutchison or Vodafone.
He, however, said FIPB was the right authority to do the due diligence and go into details of the shareholding pattern.