As US-based Walmart inches closer to acquiring a significant stake in Indian online retailer Flipkart from its existing investors that include Japan’s Softbank and US-based Tiger Global, a repeat of the infamous Vodafone tax case could be imminent if the said deal were to go through, according to tax experts. While both the acquiring and the selling entities are based outside India and the target company Flipkart Pvt Ltd is also Singapore-based, there could be a tax liability given that a substantial value in the target company is derived from India.
The Indian Express reported on Saturday that Walmart is close to sealing a deal wherein it could pick up anywhere between 60 and 80 per cent stake in Flipkart in a transaction that could value the Bangalore-based e-commerce firm at an estimated $15-20 billion. According to filings made with the Singapore Accounting and Corporate Regulatory Authority, the Flipkart shareholding entity belonging to Softbank is registered in the US, while that
of Tiger Global is registered in Mauritius.
“The indirect transfer or Vodafone provisions are now clear. As per Section 9(1) of The Income Tax Act if the value of the Indian assets is more than 50 per cent of the global assets, the shares will be deemed as Indian shares and gains if any will be liable to tax in India. Now that the rules are clearly written out, in any such transaction the 50 per cent threshold is looked at and depending on the outcome and other factors such as treaty benefits, etc the taxes are being paid and applicable reporting is also being made,” said Abhishek Goenka, partner & leader, corporate & international tax at PwC.
When contacted about the story, the Central Board of Direct Taxes (CBDT) did not respond.
In a transaction of similar nature in 2007, Vodafone International Holdings BV forayed into the Indian mobile phone market by buying 67 per cent stake in Hutchison Essar. Vodafone’s subsidiary exchanged cash for shares with a similar holding company for Hutchison Essar, in Cayman Islands. At the time, Indian tax authorities did not raise a tax demand as the deal was done offshore.
But later the Section 9 (1) (i) of The Income Tax Act was invoked, which says that “all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situated in India” shall be deemed to accrue or arise in India and will therefore be liable for tax.
The income tax department in 2010 raised a demand of over Rs 11,000 crore on Vodafone International Holdings BV, on account of its $11-billion deal to acquire Hutchison Essar.
Rajesh Gandhi of Deloitte said that the tax liability will be on the purchaser of the share – in this case Walmart – that will have to deduct the tax amount while making the payment to the exiting investors.
“There could be a demand because Flipkart (Singapore entity) has most of its value coming from India considering it’s not a global company. Any transfer of Flipkart (Singapore entity) shares could trigger a tax-liability. The tax liability will be on the purchaser of shares, who will have to deduct tax when paying to acquire Flipkart shares. If the purchaser doesn’t deduct the tax, the authorities can send them a notice,” Gandhi said.