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Reliance reveals relief formula

Mumbai, Jan. 16: Reliance Industries (RIL) today lifted the veil on tax-related issues for investors in a post-demerger scenario by suggesting a break-up formula for the cost of acquisition of the RIL scrip.

Under the formula, the cost of acquisition for Reliance Communications Ventures Ltd (RCVL) will be computed at 38.7 per cent of the original cost of the RIL share. It will be 7.3 per cent for Reliance Energy Ventures (REVL), 1.3 per cent for Reliance Capital Ventures and 0.7 per cent for Reliance Natural Resources (formerly known as Global Fuel Management Services Ltd).

Effectively, this puts the cost of acquisition of the RIL scrip at 52 per cent of the original cost.

The formula should come as a major relief for many investors of RIL as the demerger had thrown up tax related issues. There was no clarity as to what would be the cost of acquisition of the four entities, which were carved out of RIL.

The cost of acquisition is a key determinant for computing the short-term capital gains tax. For example, if a Reliance scrip was acquired in April 2005 at Rs 539.10, then the cost of acquisition for the rump Reliance stock, based on the formula released by the company today, will be Rs 280.33 per share.

According to the existing rules, if an investor sells a share after holding it for a period of less than a year and makes a gain, then he will end up paying short-term capital gains tax of 10 per cent. This is, however, not the case if he holds shares for a period of more than one year.

While the date of acquisition of a share is also critical in evaluating whether the gains arising from a transaction is short-term or long-term, there was some amount of confusion on the commencement of the holding period. Investors were not clear as to whether the date of holding begins from the date they get the shares of the four demerged undertakings or it begins from the date they hold the original company shares.

In a communication to stock exchanges today, RIL said according to section 47 (vid) of the Income Tax Act, 1961, the issue of shares by the resulting company in a scheme of demerger to the shareholders of the demerged company in consideration of demerger of the undertaking will not be regarded as transfer.

“Accordingly, the date of acquisition of shares of the resulting companies will be deemed to be the date when the equity shares of the company were acquired,” RIL said.

A leading tax consultant said the formula had tackled most of the issues that lacked clarity.

The RIL scrip today closed at Rs 873.10 on the BSE today. According to the formula and based on today’s closing quote, its price works out to Rs 454 per share. Significantly, it puts the cost of acquisition of RCVL close to Rs 332 per share. Analysts said this valuation was slightly higher than market expectations. “The market had valued the telecom business at a little over Rs 200 per share,” an analyst said.

NTPC deal

Reliance today took a stand in Bombay High Court that it had not concluded its contract with National Thermal Power Corporation for supplying gas to latter's projects in Gujarat.

RIL asserted this in an affidavit filed in response to a petition filed by NTPC urging for a direction to RIL to sign the agreement and restrict it from entering into gas supply contract with any other party.

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