New Delhi, Oct. 2: The government is likely to get around $1.3 billion as tax from Cairn Energy for selling a majority stake in its Indian arm, Cairn India, to London-listed Vedanta Resources for $6.5 billion.

“The deal is being closely watched and the tax demand will be raised at an appropriate time as the assets are based in the country and controlling stakes are being sold,” officials said.

The tax department is unlikely to face any opposition from Cairn Energy with the latter expressing its willingness to comply with the demand. The authorities want to avoid a repetition of the tax dispute in the $11.7-billion buyout of mobile firm Hutchison Essar by Vodafone.

“Tax will be paid in both India and the UK. Averaged across both countries on the gross proceeds, it will be in the low teens. What is paid will be determined eventually by the final proceeds,” a Cairn Energy spokesperson said.

Edinburgh-based Cairn Energy will have to pay about 20 per cent of the gross proceeds from the stake sale as tax.

Of the 40 per cent stake Cairn Energy will shed in Cairn India, 10 per cent have been sold to Vedanta, and the sale of the remaining 30 per cent is awaiting final closing.

Cairn Energy had acquired Shell India’s entire stake in the Rajasthan oil and gas block for around $7.25 million in 2002.

“Cairn may be liable for capital gains tax if the exchange of shares happen through the off-the-market route. Most likely, the shares will get exchanged off the market,” said Jagannadham Thunuguntla, equity head at SMC Capitals.

The Authority for Advance Ruling (AAR) had earlier ruled that share sale in an Indian firm in an off-market deal by a non-resident would attract long-term capital gains tax at the rate of 20 per cent.

In a case involving a 2009 deal between Cairn UK Holding and Petronas, the AAR had ruled that the former was ineligible to get the concessional 10 per cent tax rate on stake sale and would have to pay at the rate of 20 per cent.

In October 2009, Cairn UK had sold a 2.29 per cent stake in Cairn India to Petronas for around $241 million in an off-market deal. Petronas had gradually raised its stake in Cairn India to 14.9 per cent. In April this year, Petronas had sold the entire stake for $2.11 billion, of which around 11 per cent were picked up by Anil Agarwal’s Vedanta.

On the Cairn-Vedanta deal, analysts said the share transfer from one UK firm to another UK-based firm would attract capital gains in India as the underlying asset — Cairn India — was situated here. “Since, the base of the asset is situated here, India retains the right to tax capital gains,” said a tax consultant.

The India-UK Double Taxation Avoidance Agreement will also not come in the way as the treaty provides for tax on capital gains, according to national tax laws.

The Cairn India stake sale is likely to be completed in the third quarter of this fiscal after Vedanta Resources and Cairn Energy sign a legal agreement to share royalty and pay cess for the fields in Rajasthan.

Lanka gas find

Cairn India today said it had struck natural gas reserves in the very first well it drilled in the offshore Mannar basin of Sri Lanka.