Walmart Inc's announcement of its acquisition of e-commerce giant Flipkart has sent ripples across the e-commerce sector. E-commerce companies, especially in India, are now faced with a greater challenge – they have to deal with the combined synergies of Walmart and Flipkart.
That apart, it will be even more interesting to see how competition between two giants, Walmart and Amazon, pans out in India.
The acquisition is likely to have a widespread compliance and tax impact for both the buyer as well as the sellers. Major implications being the coverage of this transaction within the Indian tax net and if yes, the applicable rates. The gravity of these implications can be gauged from the fact that the Income Tax Department (IT-D) has apparently approached Walmart and Flipkart, offering help in determining the applicability of income tax on this transaction.
Perhaps, the Central Government has learned from the past and is trying to avoid embarrassment faced in 2012-13 with the introduction of retrospective amendment for taxing Vodafone in a similar transaction.
The existing structure and positioning of the buyer and the sellers, the extant provisions of the Income Tax Act, 1961and the recently amended India-Mauritius treaty are likely to throw up some interesting questions.
On a broad summary of the entire transaction, Japanese conglomerate SoftBank Group’s Vision Fund, according to reports, had bought about a 22 percent stake in Flipkart Singapore in August 2017 by investing an amount of about $2.5 billion. Assuming that the Vision Fund decides to sell its stake, prima facie it appears that since the shares of a Singapore entity are getting transferred outside India from one non-resident to another, there will be no tax implications in India on this leg of the transaction. However, when one takes a closer look it will be apparent that owing to the existence of the indirect transfer provisions viz., section 9(1)(i) of the Income Tax Act, 1961, the consideration received by the Vision Fund from Walmart Inc., towards such transfer of shares of the Singapore entity, will be liable to tax in India.
Section 9(1)(i) of the Income Tax Act,1961, provides that all income accruing or arising directly or indirectly, inter alia, through or from any asset or source of income in India or through the transfer of capital assets in India, shall be deemed to have accrued or arisen in India. Explanation 5 & 6 to the said section provide that an asset or capital asset in the form of shares or interest in a company incorporated outside India shall be deemed to have been situated in India if such shares or interest derive their value substantially (where the value of shares exceeds Rs 10 crore and represents 50 percent of the value of all the assets) from the assets located in India. Notably, this deeming provision was introduced retrospectively post the verdict in the Vodafone case.
Therefore, if SoftBank’s Vision Fund is transferring its shares in Flipkart Singapore, wherein such shares draw their value from India, in essence this would amount to an indirect transfer of shares of Flipkart India. Thus, in terms of the provision of the Income Tax Act, 1961, the consideration received by the Vision Fund will be eligible to tax.
In terms of the India-US tax treaty, Article 13 of the tax treaty provides that capital gains shall be chargeable to tax according to the domestic laws of the state in which such gains arise. Once it is ascertained that the amount will be taxable in India, Walmart will be required to withhold taxes in terms of section 195 of the Income Tax Act, 1961. The tax rate at which withholding of taxes is to be carried out by Walmart, while making a payment to SoftBank, will depend on the interpretation of Section 112 of the Income Tax Act, 1961.
However, tax implications will differ if the transaction is undertaken by entities resident in another jurisdiction, say, Japan, since application of treaty provisions will vary and so will the applicable rate of tax.
Another tax angle that may affect the transaction would be how US-Japan inter se look at this transaction and so goes with US-Singapore and Singapore-Japan.
Similar permutations and combinations of situations could arise in respect of the other major seller viz., Tiger Global Management, based in Mauritius, which holds about a 17 percent stake in Flipkart Singapore.
However, with regard to the recently amended India-Mauritius tax treaty, ambiguities, are likely to arise. The India-Mauritius tax treaty provides that gains from the alienation of property shall be taxable only in the country of the alienator. Assuming that Tiger Global Management is a tax resident of Mauritius then the consideration received by it from Walmart in this case shall be taxable only in Mauritius.
Considering the stakes involved in the deal, we won’t be surprised if Walmart approaches the Authority for Advance Rulings (AAR) or their assessing officer, seeking a declaration of lower / no withholding of taxes from the payment to be made to sellers in different jurisdictions.
Interpretational issues might also arise on the availability of the benefit of carry forward of losses to Flipkart India owing to such change in shareholding in the parent company. The applicability of GAAR provisions vis-à-vis the tax treaties while structuring the deal is not to be lost sight of.
By all means, this deal is likely to generate a lot of action in India in the coming years, both in the e-commerce market as well as in the tax world.
(Narayanan is Partner and Sharma, Senior Associate, Lakshmikumaran & Sridharan - a law firm specialising in the areas of international trade, taxation, Intellectual Property and corporate laws)
Updated Date: May 12, 2018 13:31 PM