THE FLIP SIDE

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