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BW Businessworld

How Not To Pay Taxes: The Jet Airways Way

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The Jet Airways page on the Bombay Stock Exchange website is awash with a series of announcements on share transfers. But no, the shares were not being transferred to the company’s new suitors Etihad Airways. Tailwinds, which held the promoter stake in the company, was transferring the company to its public face, Naresh Goyal. Tailwinds, as per Jet’s 2005 Prospectus is owned entirely by Goyal. The reason is tax, say advisors who worked on the deal.

If the shares are sold off the exchange, the applicable rate is 20 per cent of profits, payable as Long-Term Capital Gains tax. So Tailwinds, which would have had to pay a 20 per cent tax if they transferred the shares directly to Etihad, instead sold it to Naresh Goyal at the current market price on the exchanges (availing zero tax benefit for sales where Securities Transaction Tax is paid), who in turn, will sell it to Etihad in a private transaction. Since the second leg of the transaction will be executed at around the market price, there won’t be the incidence of any further taxable profits.

Veteran tax practitioner TP Ostwal points out that since the Securities Transaction Tax was introduced in India — giving a benefit of zero capital gains tax on shares that are traded on the stock exchange — many MNCs have looked at this route as a tax planning device. In an emailed response to BW|Businessworld, the company’s spokesperson said, "Since the  transaction is being examined by the concerned regulatory authorities, and their consequent approvals are awaited, it would be inappropriate for us to respond."

Such an arrangement can be at best termed as tax avoidance, not evasion, says a recent chairman of the CBDT, who didn’t want to be named. Here is a case, where a company is exploiting a loophole that is present in the law, he says, but as things stand, the Income Tax department cannot impose tax based on a hypothetical scenario of an alternate route permissible.

Not everybody is enthused, however. Proxy warrior JN Gupta, founder of Shareholder Empowerment Services is one person who has cried foul. Gupta, a former Executive Director of Sebi feels that while Sebi can give approvals related only to its domain, when the matter under consideration negatively impacts another arm of the state, the board must take that department into confidence also. Noting that the purpose of this transaction is clearly to save tax, he asks, “Can an organ of the state facilitate a transaction which deprives another organ its rightful tax?”

The questions sent to Sebi on the factors it considers before giving approvals in this regard were not replied to till the time of publishing.

This was precisely the sort of transaction that the General Anti Avoidance Rules, now deferred to 2015, was intended to trap; Under GAAR, the taxman could challenge any transaction that was intended mainly to obtain a tax benefit. They might yet not give up without a fight. Uday Ved, senior tax partner at KPMG says that Minimum Alternate Tax could apply to a transaction that claims the STT benefit as it is called if the seller is a company, a view that has been upheld by the Authority for Advance Rulings. But others like TP Ostwal believe that the law does not provide for charging MAT on foreign companies.