The Walmart-Flipkart deal is also likely to test the contours of the recently amended tax treaties that India has signed with countries like Singapore and Mauritius. As per the amended treaties exemption of capital gains tax in India would not be available in respect of any investments made after April 1, 2017 from these countries. Accordingly, Softbank could be liable to pay capital gains tax in India in respect of investments made after March 31, 2017. However, the applicable tax rate in India would get substantially reduced if such shares were acquired after March 31, 2017 and sold before April 1, 2019.
Experts said tax authorities are likely to closely verify the quantum of withholding tax deducted by the buyers in this transaction. Any tax treaty benefit claimed by non-resident taxpayers will under scrutiny by the tax authorities.
While the transaction is unlikely to face e challenge in meeting the current FDI norms that pertain to single-brand retail and the e-commerce sectors, experts point out that the entity would have to be wary of some restrictions under current guidelines. “As there are restrictions under the FDI Policy on B2C dealings through e-commerce, Walmart
cannot use Flipkart’s e-commerce platform for accessing retail customers in the Indian market,” said Atul Dua, partner, Advaita Legal. But since the control of Flipkart India would go into the hands of Walmart, a giant retailer, the tax authorities may seek details of the deal structure and the business model from the parties, he added.
Legal experts said the transaction would have to go through regulatory clearances from the Competition Commission of India. “Vendors and retailers could raise their concerns around the deal with the Competition Commission,” said a Mumbai-based lawyer who has closely followed the progress of the deal over the last 18 months.
Ticking off the tax, regulatory concerns
Tax implications for the sellers
Indian tax residents – such as Sachin Bansal, Binny Bansal - would attract long term capital gains tax to the tune of 20 per cent in India
For non-resident tax payers selling their stake, such as Tiger Global, Softbank, Accel Partners, the tax incidence would depend on the tax treaty benefits that each of them enjoy while buying the shares
Tax implications for the buyer
Withholding Tax obligation is with the purchaser. The purchaser has to deduct withholding tax to the tune of 10% on behalf of the non-resident tax payer
What the tax man will watch out for
- The quantum of withholding tax in the deal
- Verify the tax treaty benefits the non-resident taxpayers claim to enjoy
Potential issue for tax litigation
- Whether Flipkart under new ownership could carry forward existing losses
- Tax authorities are expected to disallow carry forward of existing losses as there has been a change in the beneficial ownership in the company
- Flipkart Singapore is likely to claim that the majority shareholding of Flipkart India will continue to remain with the former even after the change of ownership.
- Depending on the position taken by the tax authority, the matter is likely to end up in courts
Meeting the FDI Regulations
- As Flipkart is engaged in the market place model, FDI is permissible up to 100% under the automatic route
- Any change in shareholding of Flipkart India or its holding company Flipkart Singapore, would not require any regulatory approval from the standpoint of the FDI policy
is engaged in B2B dealings in India (offline as well as online) wherein FDI up to 100% is permitted under the automatic route
Given the restrictions under the FDI policy on B2C dealings through e-commerce, Walmart
cannot use Flipkart’s e-commerce platform for accessing retail customers in the Indian market
- The deal offers a good opportunity for Walmart to enter the food retailing in India. Current policy permits up to 100% FDI under the government approval route for retail trading (including through e-commerce) in food products manufactured and produced in India