THE FLIP SIDE

Business Today - - THE BUZZ -

THE NEWS OF THE Wal­mart-Flip­kart deal has set tongues wag­ging. It is ex­pected to run into a tax tan­gle in In­dia as ex­perts pre­dict that a Hutchi­son-Voda­fone like sce­nario could emerge given that the Wal­mart-Flip­kart deal will in­volve many overseas en­ti­ties. In the $16-bil­lion deal, US-based re­tail gi­ant Wal­mart is buy­ing 77 per cent in In­dian e-com­merce com­pany Flip­kart, in which a ma­jor­ity share is held by a Sin­ga­pore-reg­is­tered en­tity, Flip­kart Sin­ga­pore. Shares in this en­tity are, in turn, held by dif­fer­ent in­vestors – promi­nently, Softbank (al­most 23 per cent), Tiger Global (20.5 per cent) and Naspers (13 per cent). Chi­nese firm Ten­cent holds around 6 per cent stake, while pro­mot­ers Sachin Bansal and Binny Bansal to­gether hold close to 11 per cent.

The deal is be­ing struc­tured in such a way that some of these in­vestors would trans­fer their shares to Wal­mart, thus cre­at­ing a sit­u­a­tion where most of the share­hold­ers would be non-res­i­dents of In­dia. Sam­ple this: Softbank has in­vested $2.5 bil­lion in Flip­kart through its Jer­sey-based Vi­sion Fund (its in­vest­ment, re­port­edly, is now val­ued at $4 bil­lion), while Tiger Global is a Mau­ri­tius en­tity.

Even in the case of the Voda­fone-Hutchi­son deal of 2007, the former ac­quired 67 per cent stake in Hutchi­son-Es­sar Ltd from Hong Kong-based Hutchi­son Group for $11.2 bil­lion through a maze of sub­sidiaries based in the Nether­lands and Cay­man Is­lands. No tax was paid on this deal to In­dian au­thor­i­ties ow­ing to the overseas na­ture of the trans­ac­tion.

The per­ti­nent ques­tion now is whether the cap­i­tal gains made in the Flip­kart share sale by non-res­i­dent in­vestors are tax­able in In­dia or are we head­ing for an­other round of pro­tracted tax dis­pute as seen in the Voda­fone case?

Wad­ing through Am­bi­gu­ity

In 2012, the UPA gov­ern­ment, through a ret­ro­spec­tive amend­ment for which it re­ceived a lot of crit­i­cism, clearly de­fined the tax law pro­vi­sions in case of such in­di­rect share trans­fers. The law states that in­come aris­ing out of trans­fer of shares of a com­pany reg­is­tered out­side In­dia is tax­able in In­dia if such shares de­rive sub­stan­tial value – ex­ceed­ing ` 10 crore and rep­re­sent­ing at least 50 per cent of the value of all as­sets owned by the for­eign com­pany or en­tity – from as­sets lo­cated in In­dia. Tax ex­perts, there­fore, are pos­i­tive that In­dian tax au­thor­i­ties have the right to tax this deal.

“Even though the shares of Flip­kart Sin­ga­pore (a com­pany reg­is­tered out­side In­dia) will be trans­ferred to Wal­mart, gains aris­ing from such a trans­fer could be sub­ject to tax in

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