I. How the deal will be structured?

While Flipkart is owned by its parent entity that is incorporated in Singapore, Walmart is a US- based
company. Flipkart’s assets and businesses lie in India. Flipkart's existing investors have made an
investment in Flipkart Singapore, which in turn invested in Flipkart India.

The final tax liability will depend on the way the transaction is structured. According to the terms of
the deal, the transaction is expected to be a two-step process. The first step will be the Singapore
entity selling its stake in the Indian entity to Walmart. This will be done through a direct transfer.

In the second step, Flipkart Singapore will provide an exit to the identified shareholders. This could
lead to a buyback or a capital reduction process by using the money received by it from the sale of
shares of Flipkart India. The whole transaction can trigger domestic tax obligations as well as tax
treaty issues as discussed below:

II.Domestic Tax Law implications:

I. Taxation on Capital Gains:

There is a potential capital gains tax for both non-resident & resident investors under following
circumstances:

 Non-Resident Investors :

The majority of the shares sold to Walmart belong to non-resident shareholders, apart from
the resident investors. They are selling their shares in a Singapore-based company i.e.
Flipkart Pvt Ltd, which owns an Indian company to a non-resident (US) company, Walmart.

Singapore registered Flipkart Pvt Ltd holds the majority stake in Flipkart India. As per the
proposed deal, Walmart is expected to acquire shares of the Singapore entity. This will
effectively result in transfer of ultimate ownership in Flipkart India.As per indirect transfer
provisions of IT laws, 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. As more than 50% of the value of Flipkart Singapore is derived from
Flipkart India, Section 9(1)(i) of the Income Tax Act will be applicable to non-resident player
selling their stakes in a capital asset based in India to another non- resident player.

According to Section 9(1)(i) of the IT Act, any income accruing or arising, whether directly or
indirectly, inter-alia, through the transfer of a capital asset situated in India, shall be deemed
to accrue or arise in India.

Thus such sale of shares would trigger capital gains tax under the indirect transfer provision
of Income Tax Act, considering that substantial value of such shares is being derived from
India, subject to tax treaty benefits

 Resident Investors:

The Flipkart Founders intending to sell their shareholding, being Indian residents, would be
liable to pay income tax in India on capital gains arising from such transaction. The income
 tax law provides that taxes have to be withheld by the buyer if the share purchase
agreement is being entered into with a non-resident entity. With regard to share purchase
agreement entered into with India resident entity, Sachin Bansal and Binny Bansal in this
case, capital gain would be charged in their hands and they have to pay 20% of income tax.

If the shares have been held for more than two years, long-term capital gains tax at 20
percent will be applicable and they will get the benefit of indexation. Since the founders
have held their shares for more than two years, a long-term capital gain tax of 20% will be
applicable in the transfer of their shares to Walmart.

II. Carry forward of the losses:

The next issue arises as to whether Flipkart India will be allowed to carry forward the losses for the
adjustment against income tax payable by the company.

As per Section 79 of the Income Tax Act, carry forward and set-off of losses cannot happen when
more than 51 per cent of shareholding changes hands. However, Section 72A of the Act provides
that if there is demerger and merger, the company can carry forward the losses.

In a structure where the Singapore entity is selling shares of Flipkart India, the immediate
shareholding of the Indian company would change and the Indian company may not be able to
utilise the huge brought-forward losses. However these are mere speculations and it remains to be
seen how the Flipkart- Walmart deal would be finally structured.

III. Indian withholding tax requirements:

One of the significant challenges in such international transaction is meeting the Indian withholding
tax requirements. If the transaction attracts indirect transfer provisions as provided under the
Income Tax Act, 1961, Walmart Inc., will be required to with-hold taxes. The withholding provision
would apply to Walmart or Amazon if they purchase directly from Flipkart’s non-resident investors
such as Accel Partners or Tiger Global Management.

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 and the relevant tax treaties of India with
the jurisdictions of the sellers. With regard to uncertainty in tax position, parties could approach the
Authority for Advance Ruling for determination of tax liability.

IV. Application of GAAR:

The deal can also come under the scope of India’s recently implemented General Anti-Avoidance
Rule. The rule, applicable to all transactions made after April 1, 2017, enables Indian tax authorities
to scrutinize and re-characterize transactions where the “main purpose” is to obtain a tax benefit.
The Flipkart acquisition will definitely be subject to GAAR scrutiny by the tax department. But the
transaction must meet commercial substance requirement in order to meet GAAR requirements.

IV. Tax treaty Implications: The taxability of the foreign investors in Flipkart will depend on the
country through which the money is routed and whether India has a tax treaty with those nations.
The following scenarios can be predicted under relevant tax treaties involving major stakeholders in
the deal.
 India-US Tax treaty: In case of players like eBay and SoftBank US, which are US-based
players, Article 13 of the India-US treaty on capital gains taxation will get triggered.

According to Article 13 of Indo-US treaty, Except as provided in Article 8 (Shipping and Air
Transport) of this Convention, each Contracting State may tax capital gain in accordance
with the provisions of its domestic law.

In the case of SoftBank US’s share transfer to Walmart, the withholding tax will be levied
depending on the time in which they were held.

 India-Mauritius / India-Singapore tax treaty: India-Mauritius tax treaty

If the seller/transferor of such shares in Flipkart Singapore is a tax resident of Singapore/

Mauritius or any other country, which has a tax treaty with India that exempts capital gains
from income tax in India, then the seller may claim treaty benefits.

However, the tax treaties between India and Singapore as well as India and Mauritius have
been amended and exemption from capital gains tax in India was provided only till March
31, 2017. So any investment in Flipkart routed throughout these countries on or after April
1, 2017, would come within the scope of capital gains tax in India.

For instance Tiger Global, which had apparently invested in Flipkart Singapore through its
Mauritius fund can trigger capital gains taxation under India-Mauritius tax treaty. Tiger
Global may cite residency in a treaty-protected country to reduce the capital gains tax
liability under treaty.

As Tiger Global arms are registered in Mauritius/Singapore and acquired their combined 21%
stake in Flipkart before April 1, 2017, they could seek protection under the tax treaty clause.
Thus in such scenario Tiger Global would be exempt from taxes in India after the proposed
Walmart deal.

 India-Singapore tax treaty:

As some of the investors in Flipkart are based in Singapore, and shares of Singapore
Company are intended to be sold, a question will arise whether they are entitled to treaty
benefit particularly in the context of limitation of benefits under India-Singapore tax treaty.
If the Singapore-based parent is selling shares of Flipkart India to Walmart, a direct sale then
the holding firm could take benefit of non-taxability of capital gains in India under the India-
Singapore tax treaty.

For instance Japan’s SoftBank Vision Fund had pumped about $2.5 billion into Flipkart. In the
case of SoftBank, which purchased its near 21% stake in the online retaile market then the
tax rates will be half India’s domestic rates could be available. However, if the Japanese
venture capital firm chooses to carry out the stake sale indirectly to Walmart via a US-based
arm, the tax relief would not be available to it.

If SoftBank indeed takes the US route for the transaction, then it might delay the deal till
August 2019, to be the recipient of long-term, rather than short-term capital gains, which is
taxed at a higher rate. Currently, India taxes short-term (held for less than two years) capital
 gains from unlisted shares at 15%, while similar long-term (over two years) is taxed at 20%
with indexation.

How investors can claim tax treaty benefit?

An entity claiming residency in Singapore/Mauritius needs to prove “substance” in the claim by

passing the motive and expenditure tests. The motive test is to prove that the primary purpose of
deal (via the treaty protected country) is not to obtain the tax exemption. The expenditure caveat
(investment threshold) is relatively easy to surmount. As India has signed treaties with almost all the
countries involved in this deal, there is clarity in tackling issues of double taxation /double non-
taxation.

Vodafone & Idea case

Tax experts are drawing parallels between the current deal and the 2007 Vodafone deal. Vodafone’s
tax saga began when the company acquired India-based telecommunications company Hutchinson
Essar Ltd., the mobile operator, through a Cayman Islands-based subsidiary. Vodafone’s acquisition
of Hutchison Whampoa’s telecom assets in India got into a row when India’s Income Tax
Department, in September 2007, issued a notice to Vodafone saying it was liable to pay tax for the
transaction. The IT department’s argue was that the Cayman Islands transaction was essentially a
transfer of an Indian asset and, therefore, Vodafone should have deducted tax (also called
withholding tax) when it paid Hutchison for the deal.

Vodafone had contested it in courts on the basis that no tax was due in any event as the deal was
concluded in the Cayman Islands. In 2012, the Supreme Court ruled in Vodafone's favour, holding
that tax authorities do not have jurisdiction on an overseas transaction. Later, former finance
minister Pranab Mukherjee introduced amendments in the Income Tax Act, allowing authorities to
levy taxes on companies retrospectively for acquiring assets in India, even if the deal was concluded
overseas.

The indirect transfer provision of the Income Tax Act, 1961 aimed at taxing capital gains arising from
indirect transfer of shares deriving substantial value from Indian assets. The tax structure was
introduced in the aftermath of Vodafone case. The tax authority has also taken an aggressive stance
when applying the provision on indirect transfer of share, in situations when an incoming
shareholder, like Walmart, is evidently attempting to gain access to the Indian market. The present
structure of the deal has the potential to give rise to the same withholding tax that caught Vodafone
case, which might be hurtful to the investor’s sentiments involved in the deal. For instance Flipkart
will most likely enter into a deal where Amazon or Walmart purchase shares directly from the
existing investors. The deal would be subject to 20% capital gains tax, because shares are considered
movable property, which is a capital asset. For secondary purchase, Flipkart is liable to capital gains
tax subject to treaty protection and the purchaser has to withhold tax for payment to a non resident.

The withholding provision would apply to Walmart or Amazon if they purchase directly from
Flipkart’s non-resident investors such as Accel Partners or Tiger Global Management. Thus the tax
compliance will be heavily tilted towards the taxpayer due to amended provision under the domestic
tax law, in the aftermath of Vodafone case.
Reasons of high valuation of flipkart

I. Traditional methods such as discounted cash flow method have been used across various
retail sectors to make valuation of their business. While these methods still are in use
consistently but have been overlooked in valuation of e-commerce segment.
II. Ecommerce companies are moving far from these methods and are valuing their business
considering various favourable factors which push up their valuation such as sales, number
of transactions, number of customers, market size, future state of industry, optimistic
expected revenue growth. Besides, they also seem to overlook certain important factors
such as qualified human resource, logistic costs, advertising costs, cancelled/ returned
orders, shopping card abandonment rate, discount offers, etc.
III. One of the factor which is currently being highly used in valuing e-commerce companies is
GMV. GMV or gross revenue in e-commerce terms means the sale price charged to the
clients and multiplied by the number of items sold.
IV. For instance, if a company sells 100 articles at Rs 1,000 each, the GMV is Rs. 10, 0000. The
GMV is after that multiplied by multiple(x times)to get the valuation of the entity . This
method is highly criticised by brick and mortar retailers. This method is considered to be
misleading, unreliable and unstable as it omits the costs of generating revenue and
considers only the total value of goods and services. GMV also ignores discount,
returns/cancellations.
V. Hence thus could explain why Flipkart continues to increase its valuation even though it is
making losses (Flipkart reported a loss of Rs 8771 crore ($1.4 billion in financial year 2017).

Why the Acquisition took place?

In 2018, India, as an emerging market, all major economies and companies in the world had an
interest in it. Moreover, India's GDP growth rate, which was over 7% annually, was ahead of many
others. Over the years, Flipkart has demonstrated strong leadership and competitive lead in the e-
commerce sector. When the acquisition occurred, it was Indian Internet's most valued company,
with a peak estimate of more than 15 billion dollars. Flipkart was the third largest private company
to raise US dollars from among the world's leading sources. Across the last decade, Flipkart made a
series of purchases and expanded its bandwidth to cover a range of items across the spectrum. It
built the logistical structures required for quick business growth through 7500 workers and 21,000
contract labours. Flipkart has a creative and agile method for its functioning of an extensive supply
chain network across India; Walmart has the expertise, steadiness and a justification for a taping of
India's booming e-commerce market.

Both of the companies had an abundance to gain through this amalgamation. A mere example
would be considering when Flipkart’s chief competitor in India, Amazon rolled out the Prime
membership programme, it emerged to be problematic for Flipkart. Through this acquisition, Flipkart
can initiate Sam’s Club (a plan launched by Walmart) membership to contend Amazon and win over
a larger segment of the market. Moreover, Walmart's expertise in the management of the offer-line
market and cross-support would profit greatly from Flipkart's technology platform. The deal has
given online retailers who were in dire need of cash after providing competitive deals and offers for
Indian shoppers the desired confidence. Through this acquisition, Walmart sough to take advantage
of the opportunity to enter the Indian market. Similarly, in order smoothen the flow of their
operations and enter foreign markets, Flipkart wished to join hands with Walmart.

Understanding the Acquisition

 Government of India (GOI) Commerce Minister and the CCI had asked CAIT not to approve
this acquisition. An additional trade group, the All India Online Vendors Association (AIOVA),
which represents 3,500 online merchants, has teamed up with CAIT to oppose the Walmart
& Flipkart tie-up.
 Small to mid-sized traders from all throughout the country were represented by both
organisations, which were able to mobilise political backing for their concerns. Due to
violations of the Foreign Exchange Management Act, Flipkart has been under investigation
by the Enforcement Directorate, RBI, etc.
 Impending national elections, perceived infractions of regulations, and ambiguity in policy
framework all had the potential to create serious obstacles to the acquisition's
implementation. Thus, CCI, or any other Indian regulator, block the transfer of shares of a
Singapore-incorporated firm.
 In India, the authorities may, at the most, delay the granting of permits for activities in the
country. Dough McMillion, the CEO of Walmart announced when the deal was being
finalised that, India, is one of the most appealing retail marketplaces and their investments
provide an opportunity to partner with the leading e-commerce company to transform the
sector. It helped Walmart make its entry into the Indian virtual shopping space while
guaranteeing both companies’ long-term growth.
 The investment made by Walmart is around $2 billion of novel equity funding. To finance the
acquisition, Walmart seeks to use an amalgamation of freshly published borrowings and
cash. Flipkart's financial performance is to be recorded and reported under Walmart's
“International business segment when the deal of closed.” Walmart expected to have an
adverse effect of around $0.25, up to $0.30 in FY19, which involves additional investment-
related interest expenses.
 In 2020, Walmart anticipated an EPS change of around $0.60 per share, comprised of each
share will suffer operational losses of $0.40- $0.45, presuming negligible taxation benefit for
losses, which amounted to around $0.05 per share. This sum contains the values attributable
to amortization of immaterial asset and short-term asset derived from purchase accounting
and expense of interest of roughly $0.15 per share.

Additionally, Walmart submitted a report to the United States Securities and Exchange Commission
in May 2018 stating that, under the agreement situation, it was possible for Flipkart's existing
minority shareholders to demand that, after a few years, Flipkart be made an initial public offer with
a value not less than that paid to Walmart. However, there a clause that may avert minority
stockholders from coercing an IPO. Once four years have lapsed, if Walmart possesses above 85% of
its newly acquired venture, the Flipkart’s marginal shareholders will face the loss of their veto rights
on decisions and business transactions.

Conclusively, the Walmart-Flipkart acquisition is more than simply a means to compete with
Amazon. By partnering with Flipkart, Walmart would be able to make its long-awaited breakthrough
into retail in India via e-commerce. Uproar had erupted in the business following this transaction,
which has regulators into the picture. A new draft E-commerce policy was drafted, which contained
tough requirements for online retail and includes a ban on discounts.