NEW DELHI: Vijay Shekhar Sharma's acquisition of an additional 10.3% stake in Paytm from Antfin (Netherlands) throws up several tax questions for the Indian authorities.
Sharma is acquiring shares from Antfin (Netherlands) through a wholly-owned entity Resilient Asset Management BV, also based out of the Netherlands. Should the seller be paying capital gains taxes in India as both seller and the buyer are based in the Netherlands? Experts have differing views.
As per the Indian domestic tax law, any income from the sale of shares in an Indian company is deemed to accrue or arise in India and hence is subject to tax in India as capital gains.
However, a relief is available under the India-Netherlands tax treaty, which states that gains on sale of such shares will be taxable in the Netherlands only when such a sale has been made to an Indian resident by a non-resident holding a 10% stake of the Indian company. But in this case both the seller and the buyer are non-residents.
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According to IndusLaw partner Shruti KP, since both the buyer and the seller are non-resident entities based out of Netherlands, there may be no capital gains tax liability in India for the seller under the India-Netherlands Double Tax Avoidance Agreement (DTAA) since the taxing rights are granted to the Netherlands.
But other experts say provisions of General Anti-Avoidance Rule (GAAR) or Principal Test Rule (PPT) could come into the picture forcing the seller (Antfin) to pay taxes to Indian authorities.
Sandeep Sehgal, partner-tax in tax consulting firm AKM Global, says since the purchaser entity outside India is wholly owned by Vijay Shekhar Sharma (a resident), this transaction may have to go through the lens of Principal Purpose Test (PPT) Rule.
Under the Principal Purpose Test Rule, the seller and the buyer will have to prove that tax reduction is not the sole purpose of using a particular transaction. GAAR, which is an anti-avoidance law in India, also works the same way.
The other question that arises is if the transaction is taxable, whether Vijay Shekhar Sharma should withhold taxes before paying the sales consideration to Antfin given there's no cash payment involved in the deal. Resilient will issue Optionally Convertible Debentures (OCDs) to Antfin for the acquisition of the 10.30% stake.
Dhaval Jariwla, Partner with PNDJ & Associates LLP, says sale of shares of an Indian company by a non-resident to another non-resident may result in capital gains that are chargeable to tax in India subject to applicable tax treaty benefit even where such sale is for a non-cash consideration.
However, he says, the purchaser will have to closely look at and evaluate its withholding tax obligation or may consider approaching the tax authorities in relation to the same.