Awesome Flipkart-Walmart deal may get big slap in face in India

As per the proposed deal, Walmart is expected to acquire shares of the Singapore-registered Flipkart. In the normal case, capital gains will not arise. But India had introduced an amendment to nullify the Vodafone Judgment by taxing indirect transfers. On account of indirect transfer, this transaction could get taxed, because of the change in shareholding at the Singapore entity.

Flipkart-Walmart deal will trigger capital gains tax for non-resident investors as well as resident shareholders. Image source: IANS

Flipkart has been taken over by the largest retailer in the US, Walmart. And consequences thereof may well bring tears to the eyes! The taxmen in India are closely following the transaction details around Flipkart-Walmart deal as co-founders Sachin Bansal and Binny Bansal sealed the deal to sell their firm in what has been labelled as the world's biggest e-commerce deal ever. The deal will trigger capital gains tax for non-resident investors as well as resident shareholders. The capital gains tax that could be imposed on all concerned is in the range of a whopping 20-40 per cent, said experts. The amounts involved are staggering.

As per the proposed deal, Walmart is expected to acquire shares of the Singapore-registered Flipkart. In the normal case, capital gains will not arise. But India had introduced an amendment to nullify the Vodafone Judgment by taxing indirect transfers. On account of indirect transfer, this transaction could get taxed, because of the change in shareholding at the Singapore entity.

"Where the 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 and accordingly, would trigger capital gains tax in India for such non-resident investors, subject to tax treaty benefits, if any, available to such investors," said Nitesh Mehta, Partner/ Transaction Tax, Tax and Regulatory Services, BDO India.

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Tax rate could be 20 per cent to 40 per cent depending on whether gain is a long term gain or short term, he added.

For resident shareholders, say employees or Indian founders, the deal would trigger capital gains tax in India. "This would be taxed at 20 per cent to 30 per cent depending on whether the gain is long term or short term, he added.

However, where Singapore parent company of Flipkart India is selling shares of Flipkart India to Walmart i.e. direct sale of shares of Flipkart India, the Singapore parent company could take benefit of non-taxability of capital gains in India as per India-Singapore tax treaty.

"This is subject to meeting limitation of benefits clause requirements under the treaty and passing the General Anti Avoidance Rules (“GAAR”) test, especially for any investments made by Singapore parent post April 01, 2017. Further, the way in which Singapore parent company provides exit to its shareholders (post the sale of India shares) may trigger tax in India," Mehta explained.

He also pointed out at significant challenge with regards to Indians withholding tax requirements.

"One of the significant challenges in such international transactions is meeting the Indian withholding tax requirements. Walmart will need to withhold appropriate Indian taxes while purchasing stake of non-resident investors in order to comply with Indian requirements," he said.

Meanwhile, the deal will now pit Walmart directly against Amazon in their quest for supremacy in the Indian e-commerce market.

"The deal will mark a new beginning in the e-commerce industry in India which will now be dominated by Amazon and Wal-Mart. Flipkart was already struggling to keep pace with the huge investments that Amazon was able to infuse into its India operations. Now the financial muscle of WalMart will be pitted against the deep pockets of Amazon and both are expected to invest heavily in back-end infrastructure and front end logistics," said Angel Broking.

"Of course, the question still remains as to whether the idea of Indian entrepreneurs selling out to global giants is an encouraging signal for Indian Industry or not?,” the broking firm added.

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