To avoid the imbroglio seen during the Vodafone retrospective tax affair, the Central Board of Direct Taxes (CBDT) has written to the India arm of US retailing giant Walmart, seeking details of their due-diligence on tax liabilities arising from the $16-billion acquisition of e-commerce major Flipkart. And, has offered to help the company on the issue, if needed.
“CBDT has written to sensitise Walmart on the tax liability implications of the acquisition. It is not a notice. The idea is to help Walmart follow due process and pay tax as per the law. This is the first time the department has taken such a pro-active step,” said an official.
The content of the letter, sent on Tuesday, has been viewed by Business Standard. “It is hoped that the due-diligence with regard to tax liability in India of the proposed acquisition of a stake in Flipkart has been carried out,” the letter states, while seeking details on this.
The letter lists three sections of the Income Tax Act under which the deal is liable to be taxed. These are sections 5 (2), 9 (1) and 195 (2). The first sub-section deals with taxation of income which a non-resident entity has derived in India. Section 9 (1)(i), sometimes termed the ‘Vodafone section’ among tax experts, deals with income arising from indirect transfers of Indian assets in foreign deals and includes capital gains tax. Section 195 (2) pertains to withholding tax.
“The shares of Flipkart would substantially derive their value from the assets of Flipkart in India,” the letter, sent from CBDT’s Bengaluru office, stated.
Tax officials and experts say estimating how much tax each stakeholder of the deal would have to pay will depend upon a number of factors. These cannot be determined until all provisions are looked at, including cost of acquisition, country of origin and country of registration of investors like SoftBank, Naspers and Tiger Global, the time at which they had a stake in Flipkart before the Walmart acquisition, whether that stake was acquired in one go, whether they exit Flipkart completely and which double taxation avoidance agreement will be applicable in their cases.
The government official quoted above said the assessment year for which Walmart, SoftBank, Sachin Bansal, Naspers, Tiger Global and others have to pay would depend on when the deal is completed. “If the acquisition is completed in fiscal year 2018-19, then it will be applicable for assessment year 2019-20,” the person said.
It is still not certain if SoftBank, largest shareholder in Flipkart at a little over 20 per cent equity, will completely exit through the deal. Masayoshi Son, chief executive of SoftBank, had in a webinar with investors on Tuesday committed a gaffe by confirming that the deal was done, prior to it being announced officially. He said SoftBank’s stake would be worth about $4 billion, for the $2.5 billion it had invested in Flipkart last August.
While it is not certain, Naspers might completely exit from the deal and earn around $2 bn. Tiger Global’s stake would be worth around $4 bn but it is not clear how much equity it would have on completion of the deal.
Sachin Bansal’s stake in the company after the $350-million buyback of shares in Flipkart’s Singapore-based parent entity late last month stands at 5.96 per cent. This amounts to $1.23 billion, at a $20.8 billion valuation for the Flipkart group, a nearly 75 per cent increase over its previous valuation of $12 bn reported in August 2017. Of the amount Walmart has earmarked to invest in Flipkart, $2 billion will be new equity funding. The rest will be utilised to acquire stakes of existing investors in the Bengaluru-based company.