Vodafone may have to shell out withholding tax of up to Rs 3,700 crore during the current financial year on its $3.8 billion deal involving the purchase of shares from Mauritius-based Essar Com Ltd and Essar Communication Ltd. Central Board of Direct Taxes (CBDT) chairman Prakash Chandra said on Friday that Euro Pacific Security Ltd, a wholly owned subsidiary of Vodafone, has withdrawn its application from Authority of Advance Ruling where it had disputed the withholding tax demand invoking immunity under the Double Taxation Avoidance Agreement with Mauritius. Vodafone’s subsidiary had purchased 22% stake held by Essar’s Mauritius arm in the Vodafone Essar. According to CBDT, it should have deducted 20% withholding tax in addition to surcharge before making any payment.
“Tax liability will be around Rs 3,500 to Rs 3,700 crore, including surcharge,” Chandra said, hoping that Vodafone will pay the withholding tax now. He said the development will have tax implications on similar cross border M&As.
Already, the Income Tax department is working on some cases and demands would be raised soon.
“Whatever payments Euro Pacific makes to Essar, it should first deduct the tax,” Chandra said. He hoped that the company will clear all tax liability by the end of this fiscal which means the Vodafone will have to pay entire dues before March 31, 2012.
Essar’s 22% stake held by its Mauritius subsidiaries is valued at $3.8 billion, on which the Income Tax department has raised withholding tax demand. Essar’s remaining 11% stake is held by its Indian subsidiary and valued at $1.2 billion, resulting in a total deal size at $5 billion. Vodafone had already paid $1.9 billion to Essar for the first tranche of shares equivalent to an 11% stake. The remaining payment was to be made in the second week of July.
Earlier, Vodafone had said that there was no tax payable on its purchase of majority interest in Hutchison-Essar for over $11 billion in 2007. It had disputed the $2.6 billion tax liability on the company and a case is currently pending in the Supreme Court.