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Taxman lens on Flipkart deal

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

10 May 2018

Levy logic based on tweak in law

Indian tax authorities are closely following the Walmart buy-out of Flipkart and may seek to gouge taxes out of it even if it is structured in Singapore.

Officials said as of now they were following the deal and details of it were being sought from both Walmart and Flipkart.

"As we understand it a withholding tax at 20 per cent would have to be paid even if it is structured abroad," said revenue department officials.

Walmart Inc finalised a $16-billion deal late on Tuesday to acquire control of India's largest online retailer Flipkart, including $2 billion in fresh investment.

According to market sources, Walmart, the world's largest retailer, will acquire a 77 per cent stake through an investment arm in Flipkart's Singapore-based holding firm.

Revenue officials said the buy-out transfer amount would be taxable based on the indirect transfer-related provisions under Section 9 (1) (i) of the Income Tax Act introduced in 2012. The law states that income deemed to accrue or arise to non-residents directly or indirectly through the transfer of a capital asset situated in India is to be taxed in India with retrospective effect from April 1, 1962.

This came about after the revenue department had famously tried to gouge out $2 billion in taxes from a $11.2-billion deal between two overseas entities - Vodafone International Holdings, a Dutch subsidiary of Vodafone Plc, and Hong Kong-based Hutchison Whampoa and its associate firms, while selling the Indian arm of Hutch to Vodafone in 2007.

This tax demand from Vodafone was for a tax deducted at source which a buyer is supposed to deduct from any payment made to a seller and deposit with the revenue department.

A Supreme Court judgment on the issue four years back struck down an earlier Bombay high court judgment upholding the tax demand as the sale was struck in an offshore tax haven.

However, India's finance ministry stuck to its demand and brought in the retrospective amendment which clarifies that income tax laws of 1962 meant to tax any deal where the underlying asset was in India, even if the deal was struck abroad.

Said Rakesh Nangia, managing partner, Nangia & Co LLP: "Even though shares of Flipkart Singapore will be transferred to Walmart, gains arising from such a transfer could be subject to tax in India considering that substantial value of such shares is being derived from India."

Under the indirect transfer provisions of Indian income tax laws, "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", said Nangia.

Nitesh Mehta, partner/ transaction tax, tax and regulatory services, BDO India said: "Indian tax implications will depend on how the deal is structured. Where the non-resident investors offload their shares in Flipkart's Singapore parent 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."