Income Tax dept asks Walmart to pay Flipkart deal tax by September 7

Estimates peg the tax value at $2 billion; govt to assess liability based on multiple seller details

Within days of Walmart concluding the $16-billion deal to acquire a 77 per cent stake in Flipkart, the income tax department has sprung into action to get its due from the transaction. The department has set September 7 as deadline for the Bentonville-based retail major to deposit a withholding tax arising out of the mega deal, it is learnt. 

Walmart closed the deal to buy a majority stake in Bengaluru-based Flipkart last week after getting an approval from the Competition Commission of India (CCI). The two companies had announced the deal in May. 

Estimates peg Walmart’s tax liability from the deal at around $2 billion, which is more than 10 per cent of the transaction value. The withholding tax rate in the case of long-term capital gains tax is 10 to 20 per cent, depending on the nature of investment. 

The income tax department would carry out an assessment of the total liability after the American retailer deposits the withholding tax. Any withholding tax is tax deducted at source (TDS) on interest or dividends paid to an entity residing outside the country.

“After Walmart makes the deposit, we will ask them for details about where they have deducted tax and where they have not. Most sellers (Flipkart investors selling their stake to Walmart) might claim that they are exempt under the India-Singapore double tax avoidance treaty. So, Walmart will need to assess the liabilities carefully,” said a tax official. Flipkart’s parent entity is registered in Singapore and many of the company’s investors are foreign entities.  

There are around 43 sellers in question and some of them have filed withholding tax certificates under section 197 of the Income Tax Act.  Under Section 197, any NRI selling shares can give reasons to Indian authorities as to why they should be taxed at a lower or nil rate in India. 

In case the seller of such shares in Flipkart Singapore is a tax resident of Singapore or Mauritius or any other country, which has a tax treaty with India exempting such capital gains from income tax in this country, it may claim treaty benefits. Such an entity must however fulfill the substance or limitation of benefits requirements as per the relevant treaty. 

Walmart is learnt to have assured the I-T department that it would fulfill the tax obligations. “We take seriously our legal obligations, including the payment of taxes to governments where we operate.  We will continue to work with Indian tax authorities to respond to their inquiries," the Walmart spokesperson said.

The tax treaties with Singapore and Mauritius were recently amended and capital gains tax exemption in India would not be available in respect of any investment made after April 1, 2017, from these countries. However, such applicable tax rate in India could be reduced by half, if such shares acquired after 31 March, 2017, are sold before April 1, 2019.

Flipkart had earlier discussed the share purchase agreement with tax authorities to calculate the tax rate that would be applicable to investors in Flipkart  selling their shares to Walmart. SoftBank, Tiger Global, Accel Partners and Naspers were among the major foreign investors in Flipkart.

Despite shares of Flipkart Singapore getting transferred to Walmart, gains arising from such a transaction could be subject to income tax in India considering that substantial value of such shares is being derived from India, an official said. As per indirect transfer provisions of Indian income tax laws, value of shares of a foreign company is deemed to be substantially derived from India if the value of the Indian assets is greater than 50 per cent of its worldwide assets, which seems to be the case for Flipkart.

The fine print

• 77% Stake in Flipkart that Walmart has acquired 
• $16 billion Deal size
• $2 billion Estimated tax liability
• Flipkart's parent entity is registered in Singapore
• Some investors may escape tax liability on account of the India-Singapore tax treaty 
• I-T authorities to scrutinise Walmart's liability after Sept 7