Friday, December 20

This is Why SoftBank is Reluctant to Sell its 22 % Flipkart Stake

Post mega Flipkart-Walmart Acquisition, the e-commerce world has been buzzing with speculations all around as to how the mammoth deal will shape the coming scenario. Now, there is a new dimension that has come into play regarding SoftBank unwilling to sell its stakes to Flipkart.

If SoftBank was to sell its 22.3% stake in Flipkart Singapore to Walmart now or anytime before August 2019, it may have to hand over a massive $600 million to the Indian taxman out of its profit of $1.5 billion.

Just 9 months ago in August 2017, the Japanese multinational conglomerate, SoftBank had announced its investment of $2.5 billion in Flipkart Singapore via SVF Holdings.

 

Understanding the Taxation Dynamics

 

  • Right after the official announcement, more than 500 funds were set up in this jurisdiction.

 

  • Analysts believe that the fact that Singapore and Jersey have a tax treaty may have also been a factor in SoftBank’s decision to invest in Flipkart Singapore via Jersey.

 

  • Interestingly, India does not have a tax treaty with Jersey.

 

According to SoftBank’s founder and CEO Masayoshi Son, the Japanese telecom and internet company’s stake is now worth $4 billion, representing a capital gain of $1.5 billion. In this mega-deal, the shares of a foreign company (Flipkart Singapore) are to be sold by a foreign entity (SVF, the Jersey-based investment arm of SoftBank) to another foreign company (Walmart).

The fact that Flipkart Singapore holds a significant stake in the operating company Flipkart India, a large part of Singapore entity’s share is considered to be derived from assets in India.This results in two conclusions:

 

  • Firstly, It would trigger the provisions of tax on capital gains on indirect transfer of shares.

 

  • Secondly, It would result in a huge tax liability in India on shareholders who sell their stakes — including on SVF Holdings.

 

 

Long Term and Short Term Capital Gains: How do they work in India?

Capital Gains arising on sale of listed shares are subjected to a higher tax slab when done within a year of allotment. This is referred to as short-term capital gains. The rate of tax for non-resident entities can be as high as 40% in absence of any treaty provisions as in the SoftBank scenario.

On the other hand, long-term capital gains on listed shares are much lower at 10%. But the point that needs to be noted here is that in order to be entitled to 10% rate, the unlisted shares need to be held at least for 24 months.

Moreover, adding to the fact that Flipkart shares are unlisted, if SoftBank sells them now or anytime within two years of their allotment it would need to pay an upfront 40% in tax. Hence, this could be the reason that is keeping SoftBank at bay from selling its Flipkart stakes to Walmart.

If it wants to lower this tax liability to 10% it would need to hold the shares till August 2019 at the very least, and maybe longer if the actual allotment was made sometime after the August 2017 announcement.