Tiger Global is set to make over $3 billion from the $16-billion Walmart-Flipkart deal. Taxing the windfall the venture capital fund makes, however, is going to be tricky for India.
With funds registered in Mauritius, Tiger Global has offices in Bengaluru, Hong Kong, Singapore and Australia and its headquarters is in New York. It has been investing in Flipkart since 2010 from Mauritius. And, thus, experts say Tiger Global's investment in Flipkart - reportedly in tranches - may come under the Indo-Mauritius tax treaty. However, any failure on Tiger's part to meet the limitation of benefit (LoB) clauses, under the treaty, may lead to the invoking of the general anti-avoidance rules (GAAR) by the Central Board of Direct Taxes (CBDT).
According to an official, the tax department will seek the share purchase agreement from Flipkart to assess the tax liability and to find out if GAAR can be invoked.
"If the beneficiary of the deal is sitting in another country, like Tiger Global US or Tiger Global Singapore, then capital gains be taxed. The tax department may invoke GAAR to deny the provisions of Indo-Mauritius treaty to Tiger Global," said Naveen Wadhwa, deputy general manager of Taxmann.
According to an amendment to the treaty in May 2016, any investment made on or before April 1, 2017, will not attract the capital gains tax. LoB provisions were inserted to discourage multinationals from taking advantage of favourable tax treaties. So, a resident of Mauritius, including a shell, will not be entitled to 50 per cent reduction in the tax rate if total expenditure on operations in Mauritius is less than Rs 2.7 million in the 12 months immediately preceding the deal.
Also, the treaty provides that gains from share sale will be taxable only in the country of the seller. If Tiger Global proves it is a tax resident of Mauritius, gains would be taxable only in Mauritius.
"In the case of Tiger Global, where they have invested from a Mauritius entity, there is a possibility for it to claim the benefits available under the India-Mauritius treaty. But the tax department can deny the benefit if substance requirements, including the LoB clause, are not fulfilled," said Rakesh Nangia of Nangia and Co LLP.
Of the 22 per cent stake Tiger Global has in Flipkart, it will retain 5 per cent. Business Standard has reached out to Tiger Global for comments, and a reply is awaited.
The tax department is said to be going through the Section 9(1) of the income tax law, which deals with indirect transfer provisions, to see if the benefits under the bilateral tax treaties with countries like Singapore and Mauritius, could be available for foreign investors selling stakes to Walmart. Taxing SoftBank, the largest shareholder in Flipkart with a little over 20 per cent stake, however, will be easier. SoftBank is registered in the US and is governed by the Indo-US double taxation avoidance agreements (DTAA), which does not have the kind of benefits the Indo-Mauritius DTAA has.
Masayoshi Son, CEO of SoftBank, had said the company's stake (in Flipkart) would now be worth about $4 billion. SoftBank is reportedly discussing the timing of selling its stake with Walmart due to tax implications.
While it is not certain, Naspers might completely exit and would earn around $2 billion. Sachin Bansal's stake post 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.
Tax officials and experts said estimating how much tax each stakeholder would have to pay would depend on a number of factors and could not be determined until all provisions were looked at, including cost of acquisition, country of origin and country of registration of investors.
Last week, the CBDT wrote to Walmart, seeking details of their due diligence on tax liabilities. It also offered assistance to avoid the imbroglio seen during the Vodafone retrospective tax days.
Nangia and Wadhwa said the Flipkart-Walmart deal was liable to be taxed in India. "Even though shares of Flipkart Singapore will be transferred to Walmart, gains arising from such transfer could be subject to tax in India, considering a substantial value of such shares is being derived from India," Nangia said. According to indirect transfer provisions of Indian income tax laws, the value of shares of a foreign company is deemed to be substantially derived from India if the value of the Indian assets is greater than 50 per cent of its worldwide assets, which will be apparently satisfied in Flipkart's case, Nangia added.