New Delhi, May 31, 2018
The deal is done, plenty of folks made millions and now the taxman is circling in. We are talking about Walmart's $16 billion acquisition of a majority stake in Flipkart earlier this month, the world's biggest ecommerce deal to date.
According to The Economic Times, the Income Tax department had sought responses from the Bangalore-based etailer regarding the transaction even before the announcement was made.
A senior income tax official told the daily that Flipkart has "responded to the queries sent out" and provided details of the acquisition, which the department is now examining in order to ascertain tax liability. The income tax department had reportedly also written to Walmart. The idea was to not only to seek details of the transaction but also inform the company about Indian tax laws, including those on indirect transfers. The department's letter had added that they were available for any clarity in provisions but the US brick-and-mortar behemoth is yet to formally respond.
The deal is getting heightened scrutiny because of the different types of taxes applicable on it as well as the ambiguity created by last year's changes to applicable bilateral tax treaties. Also, Flipkart's parent is registered in Singapore and many of the investors who sold their stake in the company to Walmart are non-residents.
According to the report, the taxman believes that provisions relating to withholding tax will come into play where the foreign investors who made an exit are concerned. US-based firms Tiger Global Management, Accel Partners and eBay, South Africa's Naspers Ltd, China's Tencent Holdings and Japan's SoftBank have made huge profits from this deal. However, many of the major foreign investors held equity in Flipkart's Singapore-based holding company via entities in various tax jurisdictions, including countries that India previously had signed tax treaties with.
Significantly, the tax treaties between India and Singapore as well as India and Mauritius were amended last year and exemption from capital gains tax in India were provided only till March 31, 2017. So any investments routed through these countries are now liable to capital gains tax. This means that the Income Tax department will need to go through the transactions with a fine-toothed comb to look into the provision for grandfathering of investments. The daily added that the all the above will be looked at through the prism of general anti-avoidance rules. The latter put a stop on any tax benefits stemming from the bilateral tax treaties if the Department finds that a structure was created solely to avoid paying tax.
The tax norms applicable on the resident sellers - co-founder Sachin Bansal, for one - are a lot more straight-forward. They will have to cough up capital gains tax on the profits accruing from their stake sale.