Important things about Walmart-Flipkart deal With its taxation


The Entity Structure:

The below are the three entities registered in Singapore as 100% subsidiaries of Flipkart private limited (singapore):
1.   Flipkart Marketplace Pvt. Ltd,
2.   Flipkart Logistics Pvt. Ltd
3.   Flipkart Payments Pvt. Ltd.

These companies, in turn, hold stakes in five Indian entities:

a.    Flipkart India Pvt. Ltd, the wholesale cash-and-carry entity;
b.   Flipkart Internet Pvt. Ltd, which owns Flipkart.com and provides technology platform to e-commerce companies;
c.    Digital Media Pvt. Ltd, currently a dormant company, formerly known as Digital Marketplace Pvt. Ltd ;
d.   Digital Management Services Pvt. Ltd that ran Letsbuy.com;
e.    Flipkart Payment Gateway Services Pvt. Ltd,

By the entity structure you would recognise that flipkart is a company incorporated outside India having its subsidiaries in India which carries certain services. So in the section we understood that flipkart is not a single company and not an Indian company, but is a subsidiary Indian company of a foreign company. In our next section we will understand the shareholding by various stakeholders in the entity.

Pre post shareholding of various entities and persons

Below are the few major shareholders of flipkart (Singapore), these include founders, private equity firms, VCFs etc. I have also gathered their shareholding pre and post-acquisition by walmart. The details given below are limited to information available on the internet and press release and not as per the statutory documents of the flipkart or such private equity firms or individuals, as the deal broke out just 24hours ago.

Name of Shareholders
Pre-acquisition shareholding
Post-acquisition shareholding
Sachin Bansal
5.5%
Nil
Softbank
20.8%
Nil
Naspers
12.83%
Nil
EBay
6.11%
Nil
Binny Bansal
5.1%
4.5%
Tiger global management
20.6%
8%

However other major shareholders include, Tancent, Microsoft and others will remain shareholders of the merged entity. They will receive the shares of walmart. The purchase consideration for acquisition is $16bn of which $2bn will be discharged by way of shares of walmart and rest in cash.

Valuation aspect

Below is the valuation journey so far of flipkart:


You would acknowledge that the valuation has seen a downtrend from 2014, that’s when the big player Amazon entered the Indian e-commerce space and from then the game got uglier. The valuation of company touched its low in 2016, when Morgan Stanley downgraded the valuations for the second time after 2015. However from mid-2016 company was in talks with Softbank for raising money, the Japanese bank accepted the shareholding for $12bn in 2017, which earned 1.7 times of return on its capital on the sale of its stake to walmart yesterday.

Also it is worth mentioning that both amazon and flipkart haven’t made break even profits yet. The losses of the companies are primarily on deep discounts and massive advertisement campaign. And both companies have no idea of when they turn profitable.

The analysts in the industry is of the view that, the e-commerce space is currently in consolidation phase and it anticipates the threat of another big player of china in this space to unveil its presence in India and the competition will be tough for the three big players namely, amazon, walmart, and Alibaba and finally the Indian market will have a single player after the consolidation.

Tax incidence of the deal

I will once again remind you that the Fliplkart is a Singapore based company having its presence by its subsidiaries who has a place of business in India. I would like to draw your keen attention for the below mentioned transaction:

a.    Most of the shareholders of Flipkart are non- residents of India (for instance, Softbank which sold its entire stake)
b.   The company itself is not incorporated in India
c.    The purchaser (the walmart) is also a non-resident

One would get confused about the fact that how this transaction will attract tax in India, when none of the parties to the transaction are residents of India.

All my professional colleagues, and CA final students would by now identified the tax incidence and might also got the answer to this confusion and found how Indian tax authorities can tax this transaction.

The same set of transaction has occurred in 2011, on acquisition of hutch Telecom Company by Vodafone. In that transaction also none of the parties to the transaction were residents of India but the Indian tax authorities were taxing such transaction. As a result of that, tax authorities went into a long battle with the company. However the tax authorities have made amendment in law and cleared the air in these kinds of transactions, which is popularly known as Vodafone tax case.

Amendment Explanation 5 to section 9 of income tax act: Which says shares of a company, which is incorporated outside India, shall be deemed to be situated in India. If such shares derive their value substantially from the assets located in India.

In the present case, the shares of flipkart pvt ltd (Singapore) derive their value from the assets (i.e. flipkart India pvt ltd) located in India. So as per the explanation the foreign company [flipkart pvt ltd (Singapore)] shall be deemed to be situated in India and the sale of such shares by its shareholders, irrespective of the fact that they are non-residents of India, shall the taxable in India.

Also as per chapter 17 of income tax act, the tax authorities make the purchaser of the shares liable to deduct such tax and deposit to tax authorities, in this case, the walmart will be liable to deduct tax amount from the sale consideration of the shareholders(Softbank) and deposit to tax authorities in India.

At first the law when made looked ambiguous and un-understandable but with time, the law can be interpreted conveniently. Also the students would understand the importance of such amendment.

Future roadmap of e-commerce as a sector

Below are few major players in retail sector both carrying business online and offline:
Existing players
Amazon
Walmart(hitherto flipkart)
Brick and Motor retailers
•Kishore biyani's big bazar
Patanjali
Potential players
Alibaba
Reliance

As per industry analysts, the existing players, of many, major two are Amazon and Walmart who continue to compete and sell goods at deep discounts and ultimately benefit customers. However there is a concern for the brick and motor stores who will be left with fewer customers, also the aggressive sales technique of walmart are very popular which may adversely impact these stores.

The Biyani's Big bazar and Baba Ramdev’s Patanjali who are currently into brick and motor stores mulling over the entry in e-commerce space,  Alibaba will enter the Indian e-commerce space very soon and Reliance on the other hand, unlike all the other players leveraging its Jio network with brick and motor stores and will significantly hold presence in physical stores.
It’s a win - win for both customers and the vendors. 

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