The Income Tax (I-T) department wrote to US-based retailer Walmart earlier this week apprising it of the relevant Indian tax laws in the context of its $16-billion acquisition of a 77% stake in Indian e-commerce player Flipkart (the deal was announced on Wednesday), including the need to withhold taxes on the capital gains accrued to the sellers, joint secretary at foreign tax department Akhilesh Ranjan said. “We wrote to them on May 8 and have told them about the relevant due diligence required under the law. We have also told them that they could approach us for determination of withholding tax under Section 195 of I-T Act,” Ranjan told FE. Walmart said it will comply with any tax demand arising from its purchase of Flipkart stake, Bloomberg reported. “Our intent is, whether looking backwards related to our acquisition here or looking forward, we will be compliant with whatever the tax rules are,” the agency quoted Walmart chief executive officer Doug McMillon telling reporters here.
Section 195 covers provision of tax deducted at source (TDS) on payments to a non-resident. As the buyer, Walmart has the onus of withholding the tax before it pays the sellers, while the final tax liability is on the seller.
According to Ranjan, the I-T department’s letter to the US retail giant also mentioned the impact of Section 9 (1) on the transaction/s. As per the section: “All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situated in India” shall be deemed to accrue or arise in India and is liable for tax.
This piece of law was amplified in 2012, after the Vodafone episode where the government was caught on the wrong foot, by attempting retrospective taxation (the Supreme Court in January 2012 ruled in the telecom giant’s favour, saying it was not liable to pay any tax over the acquisition of assets in India from the Hong Kong-based Hutchison).
Ranjan said that it was not possible for the department to arrive at the quantum of tax liability for various stakeholders involved as the structure of the acquisition wasn’t available to it yet. Some stakeholders might have the benefit of bilateral treaties between India and other jurisdictions, Ranjan said.
FE reported earlier that SoftBank Vision Fund, which is selling its 22% stake in Flipkart to Walmart, may require to pay close to Rs 2,000 crore to Indian tax authorities as capital gains tax. While all other major investors in Flipkart are based in treaty-protected jurisdiction, the Indian tax authorities could still seek taxes from them invoking the limitation of benefit clause under the tax treaties. Also, there is the possibility of Walmart losing Flipkart’s tax shield from facility to carry forward losses. Based in the US, the SoftBank arm doesn’t have the treaty cover to claim tax exemption in India, unlike most other large investors in the Indian e-commerce firm. Since it acquired the Flipkart stake in August last year, it is also liable for a steeper short-term capital gains tax (rather than long-term) on the proceeds.
Currently, India taxes short-term (held for less than two years) capital gains from unlisted shares at 15%, while similar long-term (over two years) is taxed at 20% with indexation. Most of the large investors in Flipkart — Tiger Global, Naspers, Tencent and e-Bay — are protected by treaties that give waiver from capital gains tax in India for investors based in Cyprus, Mauritius, Singapore and the Netherlands. All these investors are based in one of these jurisdictions. However, the Indian tax authorities could still seek tax payment in India invoking the limitation of benefit clause under the tax treaties.
