Within twenty-four hours of Walmart announcing that it would take majority stake in homegrown e-commerce major, Flipkart, there were reports, which indicated that SoftBank, the largest shareholder in Flipkart, had still not made up its mind on whether it would sell its stake to Walmart. Most of these reports pointed out that the reason for this indecision was capital gains tax, which SoftBank would have to pay on its gains from a deal with Walmart. While it is still not clear whether Walmart has been able to negotiate a deal with SoftBank, there are reports that other early investors like Tiger Global might be facing taxation issues with regard to stake sale.

Meanwhile, there is another underlying issue, which policy makers need to focus upon – ease of exiting a business or investment made in India without getting involved in litigation with the authorities. If there is a tax liability, it has to be paid by investors who have made gains – there are no two ways about it. But there is another aspect to it: how that tax is collected following a transaction like the one anticipated between SoftBank and Walmart.

How tax is collected impacts the sentiment toward India as an investment destination. A negative perception that the law is subjective and non-transparent when it comes to exiting investments will only harm the country. The negative fallout from the Vodafone deal on India’s investment climate has not been forgotten. It required months of concerted effort and confidence-boosting statements from policy makers at the highest level to win back investor confidence.

Given the fact that there are hundreds of start-ups, which have still to raise money, the perception of how easy or tough it can be for investors to take home profits will impact the valuation matrix of these start-ups. While no government can afford to get negatively impacted, this government had gone on record to say that it was keen to provide the required environment for start-ups. With an ambitious initiative like ‘Startup India’ in its scheme of things to promote Indian enterprise, the government cannot, at the same time, be a silent witness as start-up valuations get dented because investors fear the possibility of litigation.

In the Flipkart case, what key revenue officials need to do is meet all stake holders in a transparent setting and help them understand their tax liability following stake sell. That will surely aid in decision-making for the shareholders: whether to sell their stake or hold it for a date when it becomes more viable to sell.

From chasing entities who avoid taxes, the revenue department should not merely act as a facilitator for a deal. It should also be aware that its actions, if not taken in a well-considered manner, may cast a shadow on India as an investment destination. One reason why it important for the revenue department to employ a transparent approach is that, in all probability, tax consultants to various parties to the deal might have suggested that tax liability can be deferred or reduced using one or the other provision of the law. If policy makers are able to create an impression that the revenue department is tax payer friendly it will go long way towards improving India’s overall rating in ease of doing business.