Walmart-Flipkart deal: Bansals may have to pay 30% capital gains tax on sale proceeds

Since Flipkart is an unlisted entity, the deal will attract additional capital gains tax. Long term and short term capital gains tax are levied at 10% and 15% of earnings, respectively, for listed entities.

Published: May 10, 2018

M Saraswathy

Moneycontrol News

Flipkart co-founders Binny Bansal and Sachin Bansal could be subject to 20-30 percent capital gains tax after their deal with Walmart goes through.

The Walmart deal will make Sachin Bansal richer by USD 1.04 billion (approximately Rs 7,006 crore), while Binny Bansal, by virtue of his partial exit, will take home USD 104 million ( approximately Rs 700 crore). Sachin Bansal, who announced his exit from the company, had said in a Facebook post that it was time to hand over the baton and move on.

Nitesh Mehta, Partner/Transaction Tax, Tax and Regulatory Services, BDO India explained that while long term and short term capital gains tax are 10 percent and 15 percent, respectively, these rates only apply to listed entities.

"Since Flipkart is an unlisted company, the tax rate would be 20 to 30 percent," Mehta said.

On May 9, Walmart announced it is buying 77 percent of Flipkart in a deal that valued the Indian e-commerce firm at a whopping USD 20.8 billion. This is the highest amount paid for any startup globally.

The tax structure

Explaining the tax structure further, Mehta said that Flipkart's existing investors have made an investment in Flipkart Singapore, which in turn invested in Flipkart India.

"Thus shares of Flipkart Singapore held by investors can be bought by Walmart which would be regarded as indirect transfer of Flipkart India shares. However, where Singapore parent company of Flipkart India is selling shares of Flipkart India to Walmart i.e. direct sale of shares of Flipkart India," he said.

According to the terms of the deal, the transaction is expected to be a two-step process. Tax experts Moneycontrol spoke to said that the first step will be the Singapore entity selling its stake in the Indian entity to Walmart. This will be done through a direct transfer.

In the second step, Flipkart Singapore will provide an exit to the identified shareholders. This, Mehta said, could be through a buyback or a capital reduction process by using the money received by it from the sale of shares of Flipkart India.

He added that the Singapore-based parent could benefit from the non-taxability of capital gains in India, in accordance with the India-Singapore tax treaty. This is, however, subject to meeting the requirements of the limitation of benefits clause under the treaty, and passing the General Anti Avoidance Rules (GAAR) test, especially for any investments made by the parent after April 1, 2017.

"One of the significant challenge in such international transaction is meeting the Indian withholding tax requirements. Walmart will need to withhold appropriate Indian taxes while purchasing stake of non-resident investors in order to comply with Indian requirements," Mehta said.

The Indian tax authorities are watching this deal closely, a source said. Tax officials told Moneycontrol that the endeavour is aimed at ensuring that all taxes due are collected at source.

Similar to Vodafone retrospective tax?

Though the Walmart-Flipkart deal is not exactly similar to the Vodafone-Hutchison agreement, parallels are being drawn between them on the tax aspect.

In 2007, when Vodafone acquired Hutchison Whampoa's telecom assets in India, it paid USD 11 billion for 67 percent of Hutchison Essar.

Following this, the Income Tax (I-T) department issued notices to Vodafone, saying it was liable to pay taxes on the transaction. The I-T department's argument was that the transaction, which took place in the Cayman Islands, was essentially a transfer of an Indian asset and, therefore, Vodafone should have deducted tax (often called withholding tax) when it paid Hutchison for the deal.

Vodafone had contested it in courts on the basis that no tax was due in any event as the deal was concluded in the Cayman Islands. Finally, in 2012, the Supreme Court ruled in Vodafone's favour, holding that tax authorities do not have jurisdiction on an overseas transaction.

Later, former finance minister Pranab Mukherjee introduced amendments in the Income Tax Act, allowing authorities to levy taxes on companies retrospectively for acquiring assets in India, even if the deal was concluded overseas.

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