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Unit 13: Tax Treatment for Business Restructuring

The tax implication will only arise when either the shares of RIL or the shares of the new Resulting Notes
Companies are sold.
Tax implications when shares are sold:
When the shares of any of the companies are sold, it would give rise to capital gains tax liability.
The three issues that arise are:
1. Whether the new shares (in the Resulting Companies) are long-term assets or short-term.
2. Indexation of the capital gains.
3. Cost of acquisition of the various shares after the demerger transaction

(a) To find out whether or not shares in the Resulting Companies are long-term or not, the
holding period of the RIL shares will be included in the period of holding of the new
shares.
(b) The indexation will start from the date of allotment of the new shares and not from the
date of acquisition of RIL. Relevance of indexation is only for working out the capital gain
amount if the same has to be set-off against capital loss. However, as explained further on,
for most shareholders, there will be no need of this.
(c) To calculate capital gains when the shares are sold, a vital piece of information is the cost
of acquisition. Your original cost of acquisition of RIL shares will change now on account
of the demerger. Plus there will be a new cost accorded to the new shares of the Resulting

Companies. The Income Tax Act specifies a complicated formula that takes into account
the proportion of the net worth of RIL vis a vis the book value of the businesses transferred
to arrive at the new costs of acquisition.
The net results of the above calculations are summarised in the following table:

Table 13.2: Cost of Acquisition of RIL Shares

Name of Company % of Cost of Acquisition of RIL Shares
Reliance Industries Limited 52.0%
Reliance Communication Ventures Limited 38.7%
Reliance Energy Ventures Limited 7.3%
Reliance Capital Ventures Limited 1.3%
Reliance Natural Resources Limited 0.7%
100.0%

Source: http://www.lexvidhi.com/article-details/taxation-aspects-of-demerger-in-india-46.html
What the above table indicates is the proportion in which your original cost of acquisition of RIL
shares will be apportioned to the new shares.
It can be understood by an example:

Example: Say, Rakesh had purchased 100 shares of RIL for ` 534 on January 10th 2005.
Consequently, his total cost of acquisition would be ` 53,400. Now, post the demerger, his new
costs would as in the table here.

New Cost Post Demerger
RIL (52% of ` 53,400) ` 27,768
RCVL (38.7% of ` 53,400) ` 20,666
REVL (7.3% of ` 53,400) ` 3,898
RCVL (1.3% of ` 53,400) ` 694
RNRL (0.7% of ` 53,400) ` 374
Total ` 53,400
Source: http://www.lexvidhi.com/article-details/taxation-aspects-of-demerger-in-india-46.html

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