India Inc faces 'M&A tax'

Guarantees given to overseas arms under I-T scanner

Some of the top Indian firms that made acquisitions abroad by setting up special purpose vehicles (SPVs) are at the receiving end of the income-tax department’s latest move. The department has been arguing that corporate guarantees, or even interest-free loans given by them to their subsidiaries abroad should attract tax, since they have “earned” fees for the financial facilities.

Calling it an “M&A tax”, which has made their acquisitions costlier and all calculations on return on capital employed (ROCE) go haywire, CFOs of these companies say they will appeal against the tax department’s “adjustments” before the appellate authority.

I-T officials say companies that have set up SPVs abroad include Tata Motors for Jaguar-Land Rover and Tata Steel for Corus acquisitions; Jindal Steel & Power for its now-withdrawn offer for a Bolivian mine; and Aditya Vikram Birla Group’s Hindalco for its $6-billion Novelis acquisition. Many other companies with similar structures are also under the tax department’s lens.

A tax official said, as the Indian companies had earned fees by giving corporate guarantees, they should be taxed. The final demand order would be sent before March 31, he said. Budget 2012-13 had given this authority to the tax department.

Tax authorities argue, as two independent parties in similar circumstances would have charged fees as compensation for the financial facility provided by one party to the other, tax should be levied on the fees.

The tax department is levying the tax assuming corporate guarantee fees at 9-12 per cent. “It’s like paying an M&A tax which was not accounted for when we went in for acquisitions,” a CFO of a large company said. Tax advisors said the guarantee fees computed by the I-T department were very high as the normal rate of such fees should not be more than 1-2 per cent.

When contacted, a Tata Steel spokesperson said: “We have not received any notice from the department on this. All corporate guarantees given by Tata Steel are disclosed in our annual reports and considered for assessment by income-tax authorities every year.”

Indian companies set up SPVs for multiple reasons, including raising funds from foreign banks at low rates and ring-fencing themselves from double taxation. SPVs, usually set up in tax havens, retain the dividend income and pay off their debt.

The I-T department is also taxing all those firms that have given interest-free loans to their subsidiaries abroad.