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Flipkart-Walmart deal could attract 20-40% cap gains tax

On account of indirect transfer, this transaction could get taxed, because of the change in shareholding at the Singapore entity

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Even as the intricacies in Flipkart-Walmart deal are being worked out, the transaction could face capital gains tax implications. Indian tax implications would depend on how the deal is structured, said experts.

Since its shares of the Singapore entity of Flipkart that are being sold, in the normal case capital gains will not arise. But India had introduced an amendment to nullify the Vodafone Judgment by taxing indirect transfers. On account of indirect transfer, this transaction could get taxed, because of the change in shareholding at the Singapore entity.

Since the value of the shares of the Singapore entity is derived substantially from the assets located in India, therefore indirect tax provisions would get applied, and the transaction would be taxable under the Income Tax Act, said Amit Maheshwari, managing partner and international tax lead of Ashok Maheshwary & Associates.

The tax rate could be 20-40%, depending on whether the gain is long term or short term, said Nitesh Mehta, partner, transaction tax, tax and regulatory services, BDO India. For resident shareholders, say employees or Indian founders, the deal would trigger capital gains tax in India, which would be taxed at 20% to 30% depending on whether the gain is long term or short term.

In case the Singapore parent company of Flipkart India is selling shares of Flipkart India to Walmart, that is, direct sale of shares of Flipkart India, the Singapore parent company could take benefit of non-taxability of capital gains in India as per India-Singapore tax treaty. This is, however, subject to meeting limitation of benefits clause requirements under the treaty and passing the General Anti Avoidance Rules (Gaar) test, especially for any investment made by Singapore parent post April 1, 2017. Further, the way in which Singapore parent company provides exit to its shareholders, after the sale of India shares may trigger tax in India, Mehta said.

There is also the issue of Flipkart India being allowed to carry forward losses, Maheshwari said, raising questions on the deal structure.

"Typically when more than 51% of the shareholding changes, then you are not allowed to carry forward the losses. But in this case the shareholding of the Indian entity is not changing. It is the Singapore entity whose shareholding is changing. So technically, Flipkart should be allowed to carry forward losses. But the government could make a pitch saying that just because of the structure, the company is being allowed to carry forward the losses,'' he said.

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