The newspapers (particularly the pink ones) are full of news, reports, analysis and everything else about the Walmart acquisition of Flipkart which was announced last week.
This supposedly biggest e-commerce acquisition deal in the world whereby Walmart has agreed to acquire a 77% stake in Indiaβs showcase e-commerce unicorn Flipkart, marks the global giantβs much-delayed entry into the Indian market. Walmart had been trying to make inroads into Indian markets yet wasnβt making much headway due to the governmentβs restrictive policies and failure of its joint venture.
The present deal has been pegged at a whopping US $16 billion (valuing Flipkart approximately over US$ 20 billion) and Walmart will be further infusing $2 billion in the Singapore based company. The deal marks the exit of private equity investors like Softbank and Naspers.
With this news being officially released by the two companies, there has been much excitement in multiple spheres – the entrepreneurial sector, PE sector and so on. Amidst this excitement, it appears that the happiest lot is the Indian Income Tax Department. It is already smelling millions and billions of dollars in tax collection out of a single deal. It reportedly has sent letters to the Walmart elaborating and explaining the current Indian taxation laws and its possible impact on the deal.
So, it is a very pertinent to answer that how this deal would be having a taxation impact.
Section 195 of the Income Tax Act makes a payer responsible to withhold taxes when the payment is being made to a foreign company and where such payment does not fall into the ambit of salaries under the income tax legislation. However, from where does this liability to pay taxes arise?
It needs a look back to the outcome of Vodafone tax case of 2012, where Vodafone Group Co. was served with a notice by the Indian Income Tax authorities for evading its responsibility to withhold taxes from the payment made to the Hutchison-Essar, based in foreign jurisdiction, for the transfer of shares of Indian company. Then, the Honβble Supreme Court decided that such capital gains cannot be taxed under the Indian Income Tax, 1961 as it did not enshrine the concept of indirect transfer.
Vide a 2012 Amendment in the section 9 of Income Tax Act, 1961 an enabling provision was added to tax capital gains arising from transfer of shares of a foreign company, where the value of such shares derives its substantial value from the assets located in India. Due to the increasing confusion for the tax payers in this regard, Finance Act 2015 clarified that shares will be deemed to derive their substantial value from Indian assets when its value is more than Rs. 100 million and represents at least 50% of the total assets of the foreign company.
It is quite apparent from Flipkart Groupβs current status, the value derived by Flipkart Singapore is because of its Indian subsidiary situated in Bangalore. Thus, the Income-tax authorities are of the view that as and when the transfer of shares takes place and consideration is paid to the outgoing investors of the company, Walmart would be liable to deduct tax to avoid any controversy similar to the Vodafone tax.
However, a reference has to be necessarily made to the double taxation avoidance agreements (DTAAs) of India with Singapore, the United States and other relevant jurisdictions, reason being DTAAs are at times more beneficial than the domestic laws. To note, under such circumstances of withholding tax can approach the relevant Assessing Officer under section 195(2) to determine the liability of the tax.
Thus, the deal is a good deal and a windfall for Indian tax department and they are more than justified in feeling super-excited about it!
Research inputs by Pradyumna Kibe
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About the Author:
Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.in