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Business

Practo has some explaining to do with tax authorities

Discrepancies in valuations cast doubt as to actual worth of health care startup

A dental clinic in Bangalore displays its Practo affiliation. (Photo by 101Reporters.com)

BANGALORE High-flying health care startup Practo is being investigated by Indian authorities as to whether it evaded tax in a cross-border corporate restructuring.

According to a notice from the Bangalore office of the Department of Income Tax seen by Nikkei Asian Review, Practo executives have been asked to explain wide discrepancies in different company valuations conducted just a month apart in 2014. The lower valuation was used in calculating capital gains tax owed on the transfer of assets to an offshore affiliate in Singapore. Tax authorities searched Practo's offices in Bangalore and seized company records in late May, according to an official familiar with the investigation.

The company helps consumers in India and 14 other countries locate doctors, book appointments and medical tests, and order medicine. It also provides online medical consultations. The company says it has handled 50 million appointments with some 200,000 health care providers.

Practo has raised $179 million to date from investors, including Sequoia Capital, Matrix Partners and CapitalG, a venture fund affiliate of Google. Its latest fundraising round in January, led by China's Tencent Holdings, brought in $55 million based on a company valuation of around $600 million.

According to regulatory filings, Practo engaged a Bangalore accounting firm to carry out an independent valuation of its intellectual property in August 2014. These assets -- including 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 aroused suspicions at the tax department, according to an official there.

The raid of Practo's offices yielded multiple certified valuation reports prepared by different Bangalore accounting firms in 2014. One from July, a month before the Singapore asset sale, put the company's worth at 4.62 billion rupees ($71.6 million). Another from a competing firm in August, which was used in setting the value of intellectual property assets, valued the company at 40 million rupees.

Neither Practo nor the Bangalore income tax office responded to questions about the case.

SINGAPORE'S ATTRACTION By paying royalties to its Singapore affiliate for use of Practo intellectual property, the company is able to lower its Indian income and consequently its domestic tax bill. Under the agreement between the two affiliates, the Indian company pays the Singapore company a royalty of 75% on revenue derived from Practo intellectual property. Facebook has faced controversy over its use of the same strategy after shifting intellectual property rights to an Irish affiliate.

Other Indian tech companies, including online retailer Flipkart, software provider Freshworks, formerly 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 skirt limits on foreign investment.

A Delhi court in 2015 ordered the government to investigate whether Flipkart, due to its Singapore-based corporate structure, and other e-commerce companies were in violation of foreign investment limits. The case was closed after the government relaxed limits last year.

Practo has already paid the capital gains tax on the Singapore asset sale based on the $600,000 valuation of the intellectual property. Dhananjayan Subramanian, an independent tax consultant in Chennai, said that if the tax department concludes 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 924 million rupees, or it might seek another valuation. Practo would be able to challenge the findings.

Practo reported a loss of $9.6 million on revenues of $25 million for the year ended March 2016. Last April it dismissed 150 staff due to disappointing company performance. The company still employs over 1,800 people.

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