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Saturday, Feb 18, 2006


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An unwitting tax liability?

S. Murlidharan

S. Murlidharan on the GACL-Holcim deal

THE Swiss cement major Holcim has acquired 20-crore shares of Gujarat Ambuja Cement Ltd (GACL) from its promoters at Rs 105 per share, of which, Rs 15 per share is reported to be the compensation for signing a non-compete agreement.

As per clause (va) of Section 28 introduced by the Finance Act, 2002 with effect from April 1, 2003, any sum, whether received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business, is taxable as one's business income unless the right to manufacture was held as a capital asset and, hence, taxable under the more agreeable head `capital gains'.

But the promoters of GACL would find it impossible to hitch their stars to the capital gains bandwagon insofar as this Rs 15 per share is concerned inasmuch as what they have transferred is not right to manufacture but shares, and for shares they have by their own admission negotiated a separate price of Rs 90 per share.

At any rate, they hardly can be said to have held the right to manufacture cement, especially now that there is no licence required for its manufacture and there was nothing to stop Holcim from starting a greenfield project. In the event, as much as Rs 300 crore — Rs 15 each on 20-crore shares — will have to be offered for taxation under the head `profits and gains of business or profession'. And this would suffer tax at the maximum marginal rate of 30 per cent plus surcharge and education cess.

In trying to help Holcim to restrict its open public offer price to Rs 90 per share, have the GACL promoters unwittingly exposed themselves to a greater tax liability? Assuming the shares transferred were long-term capital assets they would have got away with minor bruises, if at all, what with long-term capital gains being cosseted with number of tax benefits — cost-inflation index, soft-flat rate of tax and tax shelters to be specific.

For all one knows, the magical power of cost inflation index might as well have transformed the gains into losses. Assuming the transaction was outside a recognised stock exchange in India, it would be taxable at 10 per cent without the indexing benefit and at 20 per cent with indexing benefit. But even this liability could have been successfully warded off by investing the long-term capital gains in the specified bonds in terms of Section 54EC.

(The author is a Delhi-based chartered accountant.)

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