Taxmen to scrutinise Flipkart-Walmart deal

Tax experts say the transaction between the two overseas companies will be subject to capital gains tax, and they are keenly watching how the deal will be structured.

Indian tax officials might be burning the midnight oil to ensure the $16 billion deal between Walmart and Flipkart doesn’t evade tax rules here. After Walmart’s majority stake buyout of the ecommerce major, Flipkart is likely to get a detailed scrutiny from the tax department.

Tax experts said the transaction between two overseas companies would be subject to capital gains tax in India and are keenly watching how the deal will be structured. While Flipkart is owned by its parent entity that is incorporated in Singapore, Walmart is a US-based company. Flipkart’s assets and businesses lie in India.

Tax experts are drawing parallels between the current deal and the 2007 Vodafone deal. Vodafone’s acquisition of Hutchison Whampoa’s telecom assets in India got into a row when India’s Income Tax Department, in September 2007, issued a notice to Vodafone saying it was liable to pay tax for the transaction. The I-T department’s argument was that the Cayman Islands transaction was essentially a transfer of an Indian asset and, therefore, Vodafone should have deducted tax (also called withholding tax) when it paid Hutchison for the deal.

A tax expert who did not want to be named said, “If the Singapore entity has other assets outside India, then it would not be a substantial acquisition. But because Flipkart’s assets are in India, it will be considered as a substantial acquisition and therefore be subjected to capital gains tax."

He added that "if the parent has assets in other countries too, then the essential asset transfer will not be only asset transfer in India, and in that case, there is a genuine transfer outside the country."

According to a recent media report, the tax department has sent a letter to the US retail giant’s India office seeking details of the proposed deal, while apprising it of the country’s tax laws that are relevant to such transactions. The report further mentions that the tax officers have also sought details of the proposed transaction from Flipkart in Bengaluru.

Another tax expert said, “There are two things – one is if the shares of the Indian company are being transferred outside India, then it will be subjected to capital gains tax. The other aspect is to see if the substantial value of a company (Flipkart in this case) is being derived from the Indian market and Indian assets. In this case, the shares will be considered to be situated in India and the share transfer will be subjected to capital gains tax. But, we should wait for more details on how the deal will be structured to predict the trajectory of the taxation rules applied in this case”.

Riaz Thingna, Director, Grant Thornton, said, "With respect to the transfer of shareholding by Indian promoters in a non-resident company, the same will be normally taxed as Capital gains in India. And the indirect transfer provisions will apply to non-resident shareholders of the non-resident company whose value is substantially derived from its assets located in India. In the said case, if the non-resident holds less than 5 percent voting power or total interest in the non-resident company the indirect transfer provisions ought not to apply".