IT department sought explanations for wide discrepancies between different company valuations conducted just a month apart in 2014.

Healthcare startup Practo under tax authority scanner for possible tax evasionImage source: Practo Facebook page
Atom Tax Probe Saturday, June 24, 2017 - 09:09

Bengaluru-based healthcare startup Practo is facing probe by authorities for possible tax evasion through a cross-border corporate restructuring reports Nikkei Asian Review.

Practo executives have been summoned by the Bengaluru office of the Department of Income Tax, which has sought explanations for wide discrepancies between different company valuations conducted just a month apart in 2014.

The lower valuation was reportedly used in calculating capital gains tax owed on the transfer of assets to an offshore affiliate in Singapore.

Practo’s offices in Bengaluru were searched by the tax authorities and company records were seized in late May, according to an official.

The raid of revealed multiple certified valuation reports prepared by different Bengaluru-based accounting firms in 2014. One from July, a month before the Singapore asset sale, put the company's worth at 4.62 billion rupees ($71.5 million). In August, another firm, which was used to value the intellectual property assets, put Practo’s valuation at Rs 40 million.

Practo has so far raised $179 million from investors including Sequoia Capital, Matrix Partners and Alphabet, Google's parent company. Its latest fundraising round in January, led by Tencent, it raised $55 million, valuing the company at around $600 million.

Nikkei Asian Review reports that according to regulatory filings, Practo hired an accounting firm fro Bengaluru to carry out an independent valuation of its intellectual property in August 2014.

These assets, including its website, domain name, software codes and trademarks, were sold to Singapore-based Practo Pte Ltd. for $600,000 in August 2014.

In August 2015, local media reported that Practo had completed a $90 million fundraising round at a company valuation of almost $500 million.

The gap between the value of Practo's intellectual property in 2014 and the company itself a year later caught the attention of the tax department.

According to the report, Practo pays royalties to its affiliate in Singapore for the use of Practo intellectual property and hence lowers its Indian income and consequently its domestic tax bill.

Under the agreement between the two affiliates, the Indian counterpart pays the Singapore company a royalty of 75% on revenue derived from Practo intellectual property.

Practo's use of the cross-border structure and its intellectual property arrangement are not being challenged in the Bangalore case.

Other Indian tech companies including ecommerce major Flipkart, SaaS major Freshdesk and online grocer Grofers have also moved their headquarters to Singapore to take advantage of lower and simpler taxes and a more favorable legal and financial environment for fundraising as well as to get around limits on foreign investment in certain areas such as e-commerce.

Practo has already paid applicable capital gains tax on the Singapore asset sale based on the $600,000 valuation of the intellectual property.

A tax expert told Nikkei Asian Review that if the tax department finds that Practo undervalued the assets, it would likely seek to collect capital gains taxes at 20% of the higher valuation, implying a potential claim of around Rs 924 million. It could also seek another valuation. Practo can challenge the findings.

Practo is a healthcare startup that lets users locate doctors, book appointments, tests and even order medicines. It has a presence in India and 14 other and claims to have handled 50 million appointments with around 200,000 health care providers.

In FY16, Practo reported a loss of $9.6 million on revenues of $25 million.  In April this year, the company underwent an overhaul as part of which it laid off 150 employees either due to or performance or because those departments were made redundant in its restructuring.