Remember, in March-April 2018, the Indian press was abuzz with the news that Walmart was likely to pick up a substantial stake in Flipkart. The actual deal was announced on 9 May 2018. However, something happened even before the deal was announced.
India's tax authorities are keeping a close watch on Walmart's acquisition of Flipkart, that's likely to be announced today.
They have sent a letter to the US retail giant's India office seeking details of the proposed deal while appraising it of the country's taxation laws that are relevant to such transactions, said a person with knowledge of the matter.
They have also sought details of the proposed transaction from Flipkart in Bengaluru, the person said. The letter to Walmart refers to reports about a possible deal in which shareholding in the Indian etailer may be transferred between non-residents.
NEED TO WITHHOLD TAX
The transaction was likely to be announced on Wednesday, ET reported on 8th May. The income tax authorities have also asked Walmart to approach them for any clarity in the provisions of domestic tax laws, how they apply to the transaction and the resultant tax liability, the person said.
Tiger Global, Accel Partners and Naspers are the major foreign investors in Flipkart and it is likely Walmart will acquire their stakes fully or partly, as reported by ET, in deals that are executed outside India.
The tax department wants to ensure it does not lose any tax on the transaction. The Finance Act, 2012, introduced indirect transfer-related provisions under Section 9(1)(i) of the Income Tax Act and consequently the income deemed to accrue or arise to non-residents directly or indirectly through transfer of a capital asset situated in India is to be taxed here with retrospective effect from April 1, 1962.
On 11 May 2018, the ET reported
that the taxman would be happy to help Walmart in computation of tax dues. Post the transaction, there was constant reporting about the incessant follow up by the taxman to ensure that the tax dues were collected in the transaction.
Eventually, Walmart deposited a tax deducted at source (TDS) of more than US$1bn (billion) withholding tax.
One of the investors (Tiger Global) had applied for advance ruling which confirmed on the applicability of tax on transfer of its holding in Flipkart to Walmart.
And now, Holcim selling its stake in Gujarat Ambuja and ACC is a very similar deal. But have you seen any publicised effort by the taxman to calculate the tax to be paid by Holcim? Quite the reverse. Holcim has gone to extraordinary lengths to announce that it will not have to pay any tax.
It is important to know the Flipkart-Walmart transaction to understand what is happening in the Holcim-Adani case.
Brief facts of the case as reflected in the authority for advance ruling (AAR) are:
• Tiger Global, through its entity in Mauritius, owned shares of Flipkart, Singapore.
• Flipkart Singapore had invested in multiple companies in India.
• Tiger Global, Mauritius sold its holding in Flipkart Singapore to a Luxembourg entity (owned by Walmart)
• Both Singapore and Mauritius have double tax avoidance treaty (DTAA) with India and under both DTAA's Capital Gains is exempt
The basis for levy of the tax is as under:
• Flipkart Singapore derives its substantial value from stakes held in various Indian companies
• The capital gain is derived from sale of shares in Flipkart Singapore and not in respect of sale of stake in an Indian company.
• The benefits of DTAA are not available for such indirect transfer of stake.
The Circular No. 682 dated 30-3-1994 issued by the central board of direct taxes (CBDT) had clarified that any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per the Mauritius tax law and will not have any capital gains tax liability in India. It was imperative from this Circular that what was exempted for a resident of Mauritius was the capital gains derived on alienation of shares of Indian company. In the present case, capital gains has not been derived by alienation of shares of any Indian company rather the applicants have come before us in respect to capital gains arising on sale of shares of Singapore company.
The Protocol for Amendment of Convention for Avoidance of Double Taxation between India and Mauritius was signed on 10 May 2016 which provided that taxation of capital gains arising from alienation of shares acquired on or after 1 April 2017 in a company resident in India will be taxed on source basis with effect from financial year 2017-18. At the same time, investment made before 1 April 2017 was grandfathered and not subject to capital gains tax in India.
Thus, as per the amended DTAA between India & Mauritius as well, what was not taxable was capital gains arising on sale of shares of a company resident in India. It is thus crystal clear that exemption from capital gains tax on sale of shares of company not resident in India was never intended under the original or the amended DTAA between India and Mauritius. In view of this clear stipulation in the India-Mauritius DTAA, the applicants were not entitled to claim benefit of exemption of capital gains on the sale of shares of Singapore company.
• Real control of Tiger Global, Mauritius was held by a US person (as he controlled transfer of any funds in excess of US$250,000). Therefore, Tiger Global, Mauritius is not entitled to benefits of DTAA.
Tiger Global challenged the ruling in Delhi High Court which stayed the proceedings (noting in its order that the tax in respect of it is already paid) in September 2020. The case has seen no movement since then.
Now, let us look at the latest large transaction announced on 15 May 2022, whereby Adani family acquired majority stake in Ambuja Cements Ltd and ACC Ltd from Holcim for a consideration of about US$6.4bn. The facts in the case as reflected in the public announcement for open offer are:
• Holcim Switzerland owns 100% stake in Holcim Netherlands
• Holcim Netherlands owns 100% stake in Holcim Mauritius
• Holcim Mauritius owns 63% in Ambuja Cements and 4.5% in ACC
• Ambuja Cements owns 50.5% in ACC
• Holcim Netherlands has sold 100% of Holcim Mauritius to Adani Mauritius
The facts are similar in critical aspects to Flipkart case except that, in Flipkart, it was a Mauritian company selling its stake in a Singapore company. Here, a Netherlands company is selling its stake in a Mauritian company.
In this case, you would expect that the transaction would trigger the provisions relating to indirect transfer of Indian assets, given that the transaction derives its value from underlying stakes in Indian listed companies (in fact, the open offer specifies value of such underlying companies).
Now, look at the reporting since the announcement of the deal. There is no proactive follow up from taxman (at least in public domain). In fact, there is assertion from Holcim that there will be no withholding of tax on the transaction.
ET reported on 16 May 2022
: Tax department officials told ET
that the deal was unlikely to face capital gains tax if Holcim had acquired the stakes before 2017, when India and Mauritius renegotiated their bilateral tax treaty and withdrew the capital gains tax exemption available to investments from the island nation. A Mauritius-based investment company of the Holcim group had acquired Ambuja Cements (then Gujarat Ambuja Cement) in January 2006 for Rs4,500 crore. All transactions routed via Mauritius prior to the 2017 amendments were grandfathered, allowing them to enjoy exemption on capital gains tax. "A final decision will be taken by the assessing officer based on the merits of the case," a tax official said.
So, in case of Flipkart, the taxman went hammer and tongs even before the deal was formally announced and collected tax of US$1bn, whereas he seems to be conspicuous by his silence in the Holcim case, almost reluctant to even ask for his share in the transaction.
For this article, we have spoken to senior tax consultants and senior tax officials.
We have asked for Holcim's views on the taxation of its deal with Adani, but we have not heard from them so far. We will add their response to this article as and when we receive it.