TThe income tax (I-T) department expects US-based retail giant Walmart to seek the withholding tax certificate arising out of the $16-billion Flipkart acquisition within a fortnight.
The withholding tax certificate will help determine tax liability on buying 77 per cent stake in Bengaluru-based Flipkart deal that got a nod from the Competition Commission of India (CCI) on Wednesday.
“Now that CCI nod has come, Walmart is expected to close the deal within a week. We expect them to file with the I-T department seeking withholding tax certificate under section 197 in the next 15 days,” said an income tax official on the sidelines of Assocham's tax conference.
Under Section 197, any NRI selling shares can give reasons to Indian authorities as to why they should be taxed at a lower rate or nil in India.
“The commission is of the opinion that the proposed combination is not likely to have an appreciable adverse effect on competition in India and therefore, the same is hereby approved," the CCI said in its order letter.
Withholding tax is tax deducted at source (TDS) on interest or dividends paid to an entity residing outside the country. Walmart last month assured the I-T department it would fulfill all tax obligations.
Flipkart had earlier shared the share purchase agreement with tax authorities to calculating the tax rate that would be applicable for investors in Flipkart, who are selling the shares to Walmart.
“The I-T department is going through the share-purchase agreement, reading in depth which investor has routed money from which jurisdiction and when and whether any treaty benefit applies to them,” the official added.
Many investors in Flipkart, who sold their stake in the deal with Walmart, are non-residents. Flipkart’s parent entity is registered in Singapore. SoftBank, Tiger Global, Accel Partners and Naspers were the major foreign investors in Flipkart.
The withholding tax rate in the case of long-term capital gains tax is 10-20% depending on the nature of the investment.
“As per the Indian withholding tax provisions, Walmart will be liable to deduct applicable income tax on payments made to seller non-resident entity while purchasing shares in Flipkart Singapore/ Flipkart India,” said Rakesh Nangia, managing partner, Nangia Advisors.
In case the parties believe this transaction is not liable to income tax in India due to any tax treaty benefit, either purchaser or seller entity may approach the Indian tax authorities for obtaining Nilor lower withholding tax order, said Nangia. “Non-withholding of appropriate taxes shall entail interest and penal implications on Walmart,” he added.