Decoding the tax implications of $16-billion Walmart-Flipkart deal

Apart from investors and analysts, taxmen would be closely watching the $16 billion deal. Experts share insights into the tax implications for the online retail major and its employees

Question mark over carry forward of tax losses

Girish Vanvari

As the broad contours of the deal emerge, it appears that Walmart would purchase the shares of Flipkart Singapore which holds majority stake in Flipkart India to effectively gain control over its operations in the country.

The deal would result in an indirect transfer of shares situated in India. Walmart would need to closely examine any potential withholding tax obligation after due consideration to the tax residency and applicability of tax treaty on the sellers. The US retailer would have to keep an eye on the continuity of tax losses in Flipkart India.

As per Section 79 of the Income Tax Act, where a change in the shareholding has taken place in a closely-held company, the tax losses shall be available for carry-forward and set off only if 51 per cent of the voting power of the company are ‘beneficially’ held by the same persons who held the shares in the year in which the loss was incurred vis-à-vis the year in which such loss is claimed.

The Walmart-Flipkart deal envisages a change in the beneficial shareholding of Flipkart India (having tax losses) through an indirect transfer of shares i.e. without an immediate change in shareholding. One would need to examine if this would attract the provisions of Section 79.

A careful reading of the provisions indicates a change in the shareholding of the company is one of the trigger points for the applicability of Section 79. Further, the Supreme Court had in the case of Concord Industries Ltd held that one of the conditions for the applicability of Section 79 is that there should be a change in the shareholding of the company, which doesn’t happen in the present case. This had also been confirmed by the High Court in the case of Yum India and tribunals in the case of Just Lifestyle Trading and Tainwala Trading.

One observes from the above that focus is on ‘shares held’ and the corporate veil cannot be lifted.  However, in the case of Amco Power, the Karnataka High Court preferred to follow the substance over form approach and focussed on beneficial ownership, effectively implying a look-through approach and piercing the corporate veil for determining the beneficial ownership in determining the eligibility of carry forward of losses.

Though one can strongly argue that based on the Supreme Court decision, Flipkart India’s tax losses should continue even post the deal, one needs to see how the observations by the Karnataka High Court would play out. Further, all the decisions above were pre-GAAR (General Anti-Avoidance Rules). The interpretation of the GAAR provisions on indirect transfers would also matter.

(The writer is founder, Transaction Square, a tax advisory firm)

Right time for staffers to sell stock options

Mohini Varshneya

Around 500 current and former employees of Flipkart are set to become dollar millionaires after this deal. According to reports, an offer is in pipeline to buyback the vested options from employees which were earlier granted to them pursuant to an Employee Stock Option Scheme.

As the whole Walmart–Flipkart deal has not been crystallised, it is early to comment what would be the exact course of purchasing the vested options from the employees by the company. However, there are two possible courses of action which the company can opt for:

Option 1: Flipkart buys back the vested options from its employees at a pre-determined price. Under this route, value which an employee will get for selling his/her vested option would be treated as a cash incentive under the provisions of the Income Tax Act, 1961. All the cash incentives received from either the former or the present employer would be taxable under the head salary. There is only one point of taxation for the employees under this course of action.

Option 2: Walmart purchases vested shares from the employees of Flipkart at a pre-determined price. Under this route, there will be two point of taxations for the employees. First, at the time of exercising the options, the difference between market value of shares and exercise price will be treated as perquisite and will be taxed as per the income tax bracket of an employee under the head salary. Second, at the time of sale of such shares to Walmart, there will be tax on the profit earned, either as long-term or short-term capital gain.

Also, it is the perfect opportunity for the former and the present employees to participate and sell off their ESOPs in the present exit event rather than to wait for the next exit event, which may probably be the listing of the company at the stock exchanges. There would be no major difference in  the taxability of the ESOPs after listing except that, once the company get listed, if an employee instead of selling shares immediately, hold them for a minimum period of one year, a low rate of taxability of long-term capital gain will be levied.

(The writer is head, ESOP Services, Corporate Professionals Capital)