As soon as the Walmart-Flipkart deal was announced there were reports that the Indian Income Tax Department is alert and is closely observing the transactions. Experts say that there are possible implications that are likely to kick in with this transaction under the provisions of the Income-Tax Act, 1961 and the Indian taxman is looking towards the Walmart-Flipkart deal as a possible gainer.
Experts such as L. Badri Narayanan of Lakshmikumaran and Sridharan Attorneys, is of the view that Indian taxman is looking for its pound of flesh out of the transaction. “The implications for the buyer and the sellers primarily are the applicability of tax on this transaction under Indian income tax law and the rates at which such tax liability is to be discharged. If the transaction attracts indirect transfer provisions as provided under section 9(1) of the Income-Tax Act, 1961, the buyer viz., Walmart Inc., will be required to withhold taxes. Subsequently, the rates at which the taxes are to be withheld, will be required to be ascertained, keeping in view the rates in force under the domestic law read with the relevant articles of the tax treaties of India with the jurisdictions of the sellers. Moreover, possible implications of GAAR (General Anti-Avoidance Rules) on this transaction will also need to be examined,” Narayanan told THE WEEK.
He further said that, broadly, it will be relevant for the buyer and the seller to ascertain the tax implications on transfer of shares. “It seems that such transfer of shares, being indirect transfers, is more likely to be covered under domestic tax provisions introduced post the Vodafone dispute. However, the likelihood of benefits still available under some of the tax treaties needs to be ascertained. Also, considering the aggressive stands, the Indian tax authorities have been taking nowadays, it would be prudent to explore the option of withholding tax orders. One can also explore the option of seeking an advance ruling, however, the time constraint to complete the transaction may prove to be a challenge,” added Narayanan.
Shedding more light on the finances of the deal, Walmart in its statement has said that its investment of about $16 billion, which includes $2 billion of new equity funding, will help Flipkart achieve its growth potential. Walmart has an initial ownership stake of approximately 77 per cent and the remainder of ownership is held by Flipkart’s existing shareholders, including Flipkart co-founder Binny Bansal, Tencent Holdings Limited, Tiger Global Management LLC, and Microsoft Corporation.
Narayanan observed that owing to the wording of India’s tax treaty with Mauritius, there is a possibility of Walmart's Assessing Officer seeking a declaration of lower or no withholding of taxes from the payment to be made to Tiger Global.
The Walmart statement also says that the immediate focus will be on serving customers and growing the business and Walmart supports Flipkart’s ambition to transition into a publicly-listed, majority-owned subsidiary in the future. The closing is expected later in FY19, subject to regulatory approval.
The statement further says that post the deal Flipkart’s financials will be reported as part of Walmart’s international business segment and assuming that the transaction closes at the end of the second quarter of this fiscal year. Walmart expects a negative impact to Financial Year 2019 and an Earnings per share (EPS) of approximately $0.25 to $0.30, which includes incremental interest expense related to the investment. The company has said that in FY20, the company will look towards accelerated growth in the Indian market, and anticipates an EPS headwind in total of around $0.60 per share. In the mid to long term, as Walmart aims its business scales and efficiencies are realised, it will expect losses to decline and returns to improve. “Given Walmart's financial strength, we anticipate the continuation of our current share buyback program, while maintaining our strong credit profile,” the company stated.