Flipkart investor’s stake sale a bid to avoid tax: Authority of Advance Ruling

The Authority of Advance Ruling (AAR) has said a Rs 14,500-crore transaction in 2018 where a private equity investor sold its stake in Flipkart to US retail major Walmart was prima facie designed to avoid tax.

The AAR Mumbai bench’s decision means other investments that were routed through Mauritius too could come under the scrutiny of tax authorities in India if the investors seek to claim benefits under the grandfathering clause. This clause allows investors to seek tax exemption on investments made prior to 2016, when the tax treaty with Mauritius was amended.

The US-based PE firm had held the stake through an arm in Mauritius. It sought to treat the transaction under the India-Mauritius Double Tax Avoidance Agreement, and approached the AAR after the income tax department rejected its request that Walmart shouldn’t be asked to withhold tax on payment.

The AAR also rejected the application made by the Mauritius-based investment company. The AAR said the benefits of the India-Mauritius tax treaty would not be available in this transaction. It did not name the investor.

Tax experts said the department’s stand that the main purpose of the transaction was to avoid tax emanated from the changes that were made to the India-Mauritius tax treaty in 2016.

The tax department questioning this transaction involving a big US-based private equity player, industry trackers said, could possibly lead to scrutiny in several other transactions too.

The PE firm can approach high court against the AAR’s decision, or the Income Tax Appellate Tribunal if tax department raises a demand.

“The government should do away with the proviso under section 245R(2) which allows AAR to reject applications if it’s prima facie found that the transaction or issue was designed to avoid tax,” said Amit Maheshwari, a partner at law firm Ashok Maheshwary & Associates LLP.

“This AAR’s stand could set a precedent since several investments made by PE funds through Mauritius during 2012-16 are coming up for maturity,” said a partner with a leading law firm who requested anonymity. “ Now they could be asked to show substance.”