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A ‘taxing’ issue in a big deal

The Hindu |
Nitesh Mehta, Partner
M&A Tax and Regulatory

10 May 2018

Treaties may help non-resident investors avoid Indian capital gains tax

The Walmart-Flipkart deal has brought tax implications into focus. If 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.

This would trigger capital gains tax in India for such non-resident investors, subject to tax treaty benefits, if any, available to such investors, according to Nitesh Mehta, partner, transaction tax, tax and regulatory services, BDO India.

Vodafone hangover

He cited the indirect transfer tax provisions which were introduced following the Vodafone tax row. In his view, the tax rate could be 20-40% depending on whether the gain was long-term or short-term. “For resident shareholders, the deal would trigger capital gains tax in India which would be taxed at 20-30% depending on whether the gain is long-term or short-term.”

What if the Singapore parent of Flipkart India sells shares of Flipkart India to Walmart, i.e. direct sale of shares of Flipkart India? The Singapore parent could take benefit of non-taxability of capital gains in India as per the India-Singapore tax treaty, he said. This was, however, subject to meeting limitation of benefits clause requirements under the treaty and passing the General Anti-Avoidance Rules test, especially for any investments made by the Singapore parent post April 01, 2017, he added. “The way in which Singapore parent company provides an exit to its shareholders (post the sale of India shares) might trigger tax in India,” he felt.

Indian withholding tax rules also kick in, in such transactions. “Walmart will need to withhold appropriate Indian taxes while purchasing stakes of non-resident investors,” he added.

Naveen Wadhwa, DGM,, said for Flipkart’s shareholders resident in India, “capital gains... shall be taxable in India.” However, overseas shareholders are liable to pay tax in India if the resultant capital gain was taxable in India as per tax treaties, he added. “Both India-USA and India-Mauritius tax treaties provide the taxing rights to India if capital gains accrue in India as per Section 9 of Income-tax Act. India-Mauritius Treaty grandfathers the capital gains arising from sale of shares which were acquired before April 1, 2017. Accordingly, no tax shall be levied on it,” he said.