The $15-billion buyout of e-commerce player Flipkart by US retail giant Walmart is likely to attract capital gains tax under Indian laws, similar to the tax imposed on Vodafone, even though the entities are headquartered abroad. Some investors could, however, get partial relief under the tax avoidance pacts.
A formal announcement on Flipkart’s expected 70 per cent stake sale to Walmart is likely to be made this week and tax authorities are also awaiting to understand the exact contours of the deal.
“As of now, there has not been any formal communication and ideally the buying company should deduct the tax, as and when it arises,” noted an official, adding that it seems likely that there would be a tax liability arising in the country as the value of its business comes from India.
Large investors
The Bengaluru-based e-commerce retailer is headquartered in Singapore with its parent company Flipkart Ltd registered there. The other large investors in Flipkart — SoftBank, Tiger Global, Naspers and Accel Partners — are all based outside of India.
“Even though the buyer and seller in Flipkart’s case are both situated outside India, the transaction may still be liable to income-tax in India following the Vodafone ruling which makes it clear that under Section 9(1) of the Income Tax Act, if the value Indian assets of a company is more than 50 per cent of its global assets, shares will be deemed as Indian shares and gains if any will be liable to tax in India,” said Abhishek A Rastogi, Partner at Khaitan & Co.
Abhishek Goenka, Partner and Leader (International Tax), PwC, pointed out that in cases of indirect share transfers, the provisions of the law are clear now. “There is a 50 per cent value test to be satisfied and once that is done, the shares are deemed as Indian shares. Specific facts and circumstances such as benefits under a tax treaty need to be considered,” he said.
SoftBank role
As of now, it is unclear whether SoftBank, which is the largest investor in Flipkart will sell or retain part of its stake. Either ways, experts say, the Japanese major would have some tax liability from the deal. However, it could get some advantage from the double tax avoidance agreement (DTAA).
“The DTAA between India and Singapore and India and Mauritius have been recently amended and capital gains tax exemption in India would not be available for any investments made after April 1, 2017 from these countries. Accordingly, if SoftBank would have invested in Flipkart Singapore through these countries, they could be liable to pay capital gains tax in India in respect of investments made after March 31, 2017,” said Chirag Nangia, Director, Nangia & Co LLP.
However, the tax rate in India could be half, if the shares acquired after March 31, 2017 are sold before April 1, 2019, he added.
Depending on the length of investments, a long-term capital gains tax of 10 per cent or a short-term capital gains tax of 40 per cent on non-residents may have to be paid and should be ideally deducted by the buying entity and deposited with the tax authorities.
Open to litigation
Experts have also warned of possible litigation over the tax liability in coming years as well as issues such as the carry forward of losses by Flipkart.
“The transaction could open up tax litigations for Flipkart India or its shareholders, be it issue of taxability of capital gains arising to shareholders from such transaction or the issue of carry forward of existing tax losses of Flipkart India,” said Nangia. The outcome of the arbitration proceedings initiated by Vodafone Plc in the UK against the tax department’s claims will be keenly watched.