UK-based Vodafone Group is likely to pay a withholding tax of Rs 3,500-3,700 crore on the purchase of 22% equity held by Essar's Mauritius arm in the Vodafone-Essar joint venture.
The development follows withdrawal of a tax application by Vodafone's wholly-owned subsidiary based in Mauritius.
"Vodafone Mauritius [subsidiary of Vodafone] withdrew tax dispute petition from Authority for Advance Rulings [AAR], CDBT Chairman Prakash Chandra said here.
He said the Income Tax Department now presumes that Vodafone will pay the withholding tax after withdrawal of the application.
"Tax liability will be around Rs 3,500 to Rs 3,700 crore, including surcharge," he said and hoped it would be paid in this fiscal.
He said the development will have tax implications on similar cross border mergers and acquisitions.
Essar's 22% state held by its Mauritius subsidiary is valued at $3.8 billion, on which the Income Tax Department is likely to get withholding tax.
The remaining 11% of Essar's stake held by its Indian subsidiary is valued at $1.2 billion, making the total deal size $5 billion.
On March 31, Vodafone had agreed to pay $5 billion to buy Essar out of the Indian joint venture. As part of the deal, Essar agreed to exercise its right to sell 22% stake to Vodafone while the British telecom major exercised its right to buy further 11% stake held by Essar.
The Indian conglomerate held 22% stake in Vodafone-Essar through Mauritius-based Euro Pacific Securities Ltd and the other 11% through Indian-registered Essar Telecommunications Holdings.
Vodafone had approached the Authority for Advance Ruling on the extent of tax payable as the on the 22% stake held by Essar's Euro Pacific Securities.
Vodafone had already paid $1.9 billion to Essar for the first tranche of shares equivalent to an 11% stake held by Euro Pacific Securities. The balance payment is likely to be made in the second week of this month.
Earlier, Vodafone had said that there was no tax payable on its deal for buying majority stake of Hutchison in Indian telecom firm Hutchison-Essar for over $11 billion in 2007.
Terming the $2.6 billion tax liability on the company as "inequitable", UK-based Vodafone had questioned the Indian authorities for not raising the tax claim on the party (Hutchison) which made profit by selling its stake.
Vodafone had also said that under existing Indian laws it was not required to withhold tax on the deal because the transaction took place in the Cayman Islands and both the buyer and seller were foreign.
