Taxmen have begun to scrutinise the $3.8-billion (3.3-billion euro) Unilever-GSK transaction and could raise demand on the value of the sale of Horlicks brand to the Anglo-Dutch multinational by invoking provisions relating to indirect transfer of shares, tax experts and lawyers said on Tuesday.
Tax officials could also raise the issue that goods and services tax (GST) of 12% is applicable on the overseas transaction as its value is derived from the Indian market, but the two companies and their lawyers are expected to counter this.
The merger announced on Monday values GSK Consumer Healthcare at Rs 31,700 crore and its shareholders will get 4.39 shares of Hindustan Unilever for every share they own. After the merger, which is expected to be completed in a year, Unilever’s holding in HUL will fall from 67.2% to 61.9%. GSK Plc will become the secondlargest shareholder in the merged entity with 5.7% stake, though it has plans to sell the shares at an appropriate time later.
As per the deal, the Horlicks brand, which is currently owned by GSK Plc, will be acquired by parent Unilever and HUL will pay royalty for its use in India. The income-tax department may invoke provisions relating to indirect transfer of shares and demand tax on this leg of the transaction, said people in the know. Since most of the valuation for Horlicks — about 80% — is derived from India, this could even attract long-term capital gains tax, experts said.
“As per news reports, GSK India is likely to merge with HUL. In that structure, while the merger may be ‘tax neutral’ subject to fulfilment of prescribed conditions under Income Tax Act, the shareholders of GSK India who will receive shares of HUL pursuant to the merger, may have 10% long term capital gains tax liability if they were to divest these shares,” said Sanjay Sanghvi, senior tax partner, in law firm, Khaitan & Co.
The tax treatment of transfer of a ‘brand’ between two foreign companies is contentious and would primarily depend on the ‘situs’ of the brand and related aspects.
Taxmen begin scrutiny of Unilever-GSK deal
HUL refused to comment on a detailed questionnaire sent by ET.
A GSK UK spokesperson said, “The subsequent sale of HUL shares will be subject to tax in accordance with Indian law. There will be no indirect transfer of shares in India and Indian GST does not apply on the transfer of shares of an Indian company.”
As per the regulations for indirect transfer of shares, if the stock of an Indian company held by a foreign firm constitutes more than 50% of its total assets, the transaction would be taxed in India. The deal between Unilever and GSK can attract up to 40% tax, experts said.
“We had considered indirect transfer of shares when the transaction was being effected. But we hope that since the transaction is not happening in India and it’s a high-profile deal, those provisions would not be triggered,” said an expert advising HUL on the transaction.
Companies approach tax experts
Both GSK and HUL have approached tax experts to help structure a deal that would avoid paying GST as well, said people with direct knowledge of the matter. “The consumption and usage of the brand (Horlicks) does not have any relevance and it is merely licensed in India to ensure protection from other copycat products. However, the GST law could be tested in this regard as the only precedent is present under the earlier tax regime,” said a tax lawyer advising one of the two companies.
“The indirect tax department can look to levy GST on the whole transaction since the brands primarily derive their value from India,” said Girish Vanvari, founder of tax advisory firm Transaction Square.
The deal, however, is not without some tax benefits for Hindustan Unilever. HUL would be able to take advantage of goodwill depreciation to reduce its tax liability, said a person working in the tax department of one of the companies. Goodwill is a concept that includes intangible assets, and could be subjected to deprecation in accounting.
“The merger will result in the creation of accounting goodwill and other intangibles in the books of HUL. Based on a Supreme Court decision, HUL would have the opportunity to claim tax depreciation (25% on written down value basis) on the goodwill so recorded. If such a claim is made and is successful, this could lower the effective tax rate of HUL and will be a big synergy arising out of the merger,” said Vanvari.