BAT recently disposed of a 2.5% stake in ITC Limited to realise GBP1.05bn proceeds, of which GBP200m will be deployed for share buyback in FY25, bringing the total to GBP1.1bn for the year.
Thank you for the good article, Anthony. Has BAT mentioned how much tax they will pay on the capital gain? Claude and ChatGPT both come up with an estimate in the 10-15% range but there are many considerations.
There's no direct disclosure on this, but we may make a guess. BAT completed a block trade of 313,000,000 ordinary shares at ₹413 per share. Using a GBP to INR exchange rate of 115 on 28 May, this translates to INR 129.7 billion (approximately £1.124 billion) in gross proceeds from disposal, while the net proceeds from the Block Trade amount to INR 121 billion (approximately £1.05 billion). The £74 million difference between the two numbers (~6.6% of gross proceeds) could be attributable to capital gains tax and transaction fees.
The key to calculating the capital gains on such a long-term holding lies in establishing the "cost of acquisition". Given the historical nature of BAT's investment, dating back to the early 1900s, tracking the original cost is practically impossible. This is where the grandfathering clause under Section 112A of the Indian Income Tax Act comes into play.
For listed equity shares acquired before February 1, 2018, the law provides a mechanism to determine a fair cost basis. The cost of acquisition is deemed to be the higher of:
1. The actual cost of acquiring the shares.
2. The lower of the Fair Market Value (FMV) of the shares on January 31, 2018, and the sale price.
Given the very low historical acquisition cost, the second clause becomes the effective cost basis for BAT. The closing price of ITC Limited's shares on the National Stock Exchange (NSE) on January 31, 2018, was approximately ₹271.4 per share. The applicable LTCG tax rate for such a transaction, as per Section 112A for sales occurring after July 23, 2024, is 12.5% on the gains exceeding a nominal threshold of ₹125,000.
Based on this, the capital gains calculation is as follows:
313,000,000 x (₹413 - ₹271.4) x 12.5% = INR5.54 billion (approximately £48 million)
A surcharge is levied on the income tax if the total income exceeds certain limits. For a foreign company, the surcharge rates can be 2% or 5%. Assuming the higher surcharge of 5% applies due to the substantial gain, and a Health and Education Cess of 4% on the tax and surcharge, the final tax liability would be higher.
Assuming a 9% surcharge (5%+4%), then the final tax bill could be INR6bn (approximately £52 million). If I subtract £52 million tax from £74 million, then the remaining £22 million could be attributable to brokerage and professional fees (and/or any costs incurred for repatriation of cash from India), amounting to 2% of the gross proceeds.
Thank you for the good article, Anthony. Has BAT mentioned how much tax they will pay on the capital gain? Claude and ChatGPT both come up with an estimate in the 10-15% range but there are many considerations.
There's no direct disclosure on this, but we may make a guess. BAT completed a block trade of 313,000,000 ordinary shares at ₹413 per share. Using a GBP to INR exchange rate of 115 on 28 May, this translates to INR 129.7 billion (approximately £1.124 billion) in gross proceeds from disposal, while the net proceeds from the Block Trade amount to INR 121 billion (approximately £1.05 billion). The £74 million difference between the two numbers (~6.6% of gross proceeds) could be attributable to capital gains tax and transaction fees.
The key to calculating the capital gains on such a long-term holding lies in establishing the "cost of acquisition". Given the historical nature of BAT's investment, dating back to the early 1900s, tracking the original cost is practically impossible. This is where the grandfathering clause under Section 112A of the Indian Income Tax Act comes into play.
For listed equity shares acquired before February 1, 2018, the law provides a mechanism to determine a fair cost basis. The cost of acquisition is deemed to be the higher of:
1. The actual cost of acquiring the shares.
2. The lower of the Fair Market Value (FMV) of the shares on January 31, 2018, and the sale price.
Given the very low historical acquisition cost, the second clause becomes the effective cost basis for BAT. The closing price of ITC Limited's shares on the National Stock Exchange (NSE) on January 31, 2018, was approximately ₹271.4 per share. The applicable LTCG tax rate for such a transaction, as per Section 112A for sales occurring after July 23, 2024, is 12.5% on the gains exceeding a nominal threshold of ₹125,000.
Based on this, the capital gains calculation is as follows:
313,000,000 x (₹413 - ₹271.4) x 12.5% = INR5.54 billion (approximately £48 million)
A surcharge is levied on the income tax if the total income exceeds certain limits. For a foreign company, the surcharge rates can be 2% or 5%. Assuming the higher surcharge of 5% applies due to the substantial gain, and a Health and Education Cess of 4% on the tax and surcharge, the final tax liability would be higher.
Assuming a 9% surcharge (5%+4%), then the final tax bill could be INR6bn (approximately £52 million). If I subtract £52 million tax from £74 million, then the remaining £22 million could be attributable to brokerage and professional fees (and/or any costs incurred for repatriation of cash from India), amounting to 2% of the gross proceeds.