GSK’s sale of 5.7% stake in merged entity may be liable for LTCG tax

NEW DELHI: GlaxoSmithKline Plc’s decision to exit its consumer healthcare business in India could make it liable to long-term capital gains tax. However, Hindustan Unilever Ltd (HUL) may get to mitigate its tax outgo in subsequent years, given that part of the deal value will be on the goodwill the asset brings to its books, said experts.

As part of the deal announced on Monday by GSK and Unilever Plc, their Indian units— GSK Consumer Healthcare Ltd and Hindustan Unilever Ltd— will merge by the end of 2019. This part of the transaction will not be taxable, but GlaxoSmithKline’s subsequent sale of its 5.7% stake in the merged entity will be.

A GlaxoSmithKline press statement, announcing the deal, said that the 133.7 million HUL shares it will receive after the merger will have a value of ₹23,000 crore. India taxes longterm capital gains tax at 10%.

However, HUL, through which the deal is being executed, will be able to amortize, in subsequent years, the goodwill that part of the transaction value will be attributed to, said Girish Vanvari, founder of advisory firm, Transaction Square.

The premium paid over an intangible asset’s book value can be amortized in subsequent years as per the Income Tax Act, said Ved Jain, former president, Institute of Chartered Accountants of India.

However, GlaxoSmithKline has not specified a time-frame for monetizing the shares in the merged entity. “Following completion of the transaction, currently expected by the end of 2019, GSK intends to sell down its holding in HUL. Such sell down will be in tranches and, at such times as GSK considers appropriate, taking into account market conditions,” said GlaxoSmithKline. The companies did not divulge further details on how the sale will be executed.

An official with the income tax department, requesting anonymity, said the authority will wait for more information on the transaction before taking a decision.

“We take decisions in such matters only when there is clarity on the definite contours of the transaction. The proposed merger will only get completed by end of 2019.”