Walmart-Flipkart deal may prove to be a tax tangle

Walmart-Flipkart deal may prove to be a tax tangle

The tax on the deal arises due to indirect transfer provisions of Indian income tax laws. The tax provisions say income arising out of transfer of share of a company registered outside India is taxable in India, if such shares derive substantial value from assets located in India.

Dipak Mondal
  • New Delhi,
  • Updated May 31, 2018 3:45 PM IST
Walmart-Flipkart deal may prove to be a tax tangle

The $16-billion Flipkart-Walmart deal, in which the US retail giant Walmart is buying 77 per cent of the Indian e-commerce giant, would lead to a number of tax implications. Though much of it would depend on the way the deal is structured, tax experts are of the view that the deal would end up in a Hutchison-Vodafone like situation, where Walmart will need to withhold appropriate taxes, while purchasing holdings of non-resident investors in order to comply with Indian requirements.

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The tax on the deal arises due to indirect transfer provisions of Indian income tax laws. The tax provisions say income arising out of transfer of share of a company registered outside India is taxable in India, if such shares derive substantial value from assets located in India.

"The value of shares of a foreign company is deemed to be substantially derived from India where the value of the Indian assets is greater than 50 per cent of its worldwide assets, which will be apparently satisfied in Flipkart's case," says Rakesh Nangia, Managing Partner, Nangia & Co LLP, a chartered accountancy firm.

Flipkart India has an interesting shareholding. It is held by Flipkart Singapore, which in turn is held by shareholders like Softbank USA and Tiger Global, Mauritius. Though major assets or the capital assets of the entire transaction is located in India.

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"When non-resident investors offload their shares in Flipkart's Singapore parent company to Walmart, such transfers could be regarded as indirect sale of shares of Flipkart India and accordingly, would trigger capital gains tax in India for such non-resident investors, subject to tax treaty benefits, if any, available to such investors," says Nitesh Mehta, Partner/Transaction Tax, Tax and Regulatory Services, BDO India.

This indirect transfer tax provisions were introduced through retrospective amendment in 2012 after the Vodafone controversy.  Tax rate could be 20-40 per cent depending on whether gain is a long term gain or short term. "For resident shareholders say employees or Indian founders, the deal would trigger capital gains tax in India which would be taxed at 20-30 per cent depending on whether the gain is long term or short term," says Nitesh Mehta.

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The question though is given the kind of complex shareholding, what is (are) the tax treaty(ies) that comes into the picture in this whole transaction. There seems to be some difference in opinion on it among tax experts. While most tax experts are of the opinion that the deal would trigger the Singapore treaty, L Badri Narayan, tax partner in law firm Lakshmikumaran & Sridharan, has a different view.

According to him, since Softbank US and Tiger Global, Mauritius, are selling their holdings in Flipkart Singapore, the Indo-US and Indo-Mauritius treaties would come into the picture, and not the Singapore treaty as there is no change in Flipkart Singapore's holding in the Indian subsidiary.

According to L Badri Narayan of Lakshmikumaran & Sridharan, the US Treaty says that the capital gains arising from the transaction should be treated as per the domestic law of the individual state, which effectively means that Indian law would be applied to the transaction. However, it is the Mauritius leg of the transaction involving Tiger Global's  sale of its holding in Flipkart Singapore that could lead to some ambiguities, says L Badri.

Whichever treaties come into picture, there are complications associated to them. Irrespective of their tax residents, if a seller of shares in Flipkart Singapore is a tax resident of a country with which India has a tax treaty which exempts such capital gains from tax  in India, then the seller may claim treaty benefits provided they fulfill the limitation of benefits requirements.

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The Indo-Singapore and Indo-Mauritius tax treaties were recently amended doing away with the capital gains tax exemption in respect of any investments made after 1 April 2017 from these countries.

According to Amit Maheshwari, managing partner of Ashok Maheshwary and Associates, investments made prior to 1 April 2017 could be grandfathered. However, grandfathering would be subject to satisfaction of limitation of benefit conditions.

Under the Singapore treaty, to avail of treaty benefits, an tax resident must have an annual expenditure on operations is at least $200,000 in Singapore for each of the 12-month periods prior to the date of such gain. Under Mauritius treaty limitation of benefit clause, treaty benefits cannot be availed if an entity's expenditure on operations in that state is less than Mauritian Rupees 1.5 million in the immediately preceding 12- month from the date the gains arise.

Also read: Flipkart deal to create 10 million jobs in India, says Walmart CEO Doug McMillon

Published on: May 10, 2018 9:15 PM IST
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