Tax issues to dominate for quite a while
More than meeting the regulatory guidelines, tax-related issues may continue to vex the Walmart-Flipkart transaction for some time to come. Whether tax authorities allow carry forward of existing losses of Flipkart India — amounting to around
$1.3 billion — under the new management, is likely to be a bone of contention, point out tax experts. The taxability of capital gains accruing to erstwhile shareholders of Flipkart who have sold off their shares is the other issue that needs more clarity, experts add.
They point out that even though shares of Flipkart Singapore, a company registered outside India, will be transferred to Walmart, gains arising from such transfer are subject to tax in India. This is because a substantial value of such shares is derived from business activity in India. “The transaction may open up tax litigation for Flipkart India or its shareholders, be it on the issue of taxability of capital gains or the issue of carry forward of existing tax losses,” says Rakesh Nangia, managing partner, Nangia & Co.
The matter relating to carry forward of losses for adjustment against income tax payable by the company is likely to end up in courts, depending on the position taken by the tax authorities, points out Girish Vanwari, founder, Transaction Square, a tax and regulatory advisory firm. Tax authorities are expected to disallow carry forward of existing losses as there has been a change in the beneficial ownership in the company. However, the new management of Flipkart is likely to contend that the majority shareholding of Flipkart India will continue to remain with Flipkart Singapore, experts say.
The Walmart-Flipkart deal is also likely to test the contours of the recently amended tax treaties that India has signed with countries like Singapore and Mauritius. According to the amended treaties, exemption of capital gains tax in India will not be available in respect of any investments made after April 1, 2017, from these countries. Accordingly, Softbank could be liable to pay capital gains tax in India in respect of investments made after March 31, 2017. However, the applicable tax rate in India will be substantially reduced if such shares are acquired after March 31, 2017, and sold before April 1, 2019.
Experts say tax authorities are likely to closely verify the quantum of withholding tax deducted by buyers in this transaction. Any tax treaty benefit claimed by non-resident taxpayers will come under scrutiny by the tax authorities.
While the transaction is unlikely to face much challenge in meeting the current FDI norms that pertain to single-brand retail and the ecommerce sectors, experts point out that the entity will have to be take note of some restrictions under the current guidelines. “As there are restrictions in the FDI Policy on B2C dealings through e-commerce, Walmart cannot use Flipkart’s e-commerce platform for accessing retail customers in the Indian market,” says Atul Dua, partner, Advaita Legal. But since the control of Flipkart India will go into the hands of Walmart, a giant retailer, the tax authorities may seek details of the deal structure and the business model from the parties, he adds.
Legal experts say the transaction will have to seek regulatory clearances from the Competition Commission of India. “Vendors and retailers could raise concerns around the deal with the Competition Commission,” says a Mumbai-based lawyer who has followed the progress of the deal over the last 18 months.