Flipkart deal: Walmart pays $2.5 bn withholding tax

By: and | Published: September 8, 2018 5:13 AM

Income tax rules require the buyer (Walmart) to discharge its tax liability within the first seven days of the subsequent month of closing the deal, which was approved by fair market regulator Competition Commission of India (CCI) last month.

US retail giant Walmart has deposited about $2.5 billion as withholding tax, a liability that arose after the company acquired 77% of e-commerce firm Flipkart for $16 billion in May, sources privy to the development told FE.

Income tax rules require the buyer (Walmart) to discharge its tax liability within the first seven days of the subsequent month of closing the deal, which was approved by fair market regulator Competition Commission of India (CCI) last month. The tax department said the company had till September 7 to consult the department to firm up its liability.

A Walmart spokesperson said, “We take our legal obligations seriously, including paying taxes to governments where we operate. Following our Flipkart investment, we have now completed our tax withholding obligations under the guidance of the Indian tax authorities.”

According to the rules governing such transactions, where many sellers are based in foreign countries, the buyer needs to withhold taxes on capital gains accrued to sellers, though the final tax liability is with sellers. Section 195 of the Income Tax Act covers the provision of tax deducted at source on payments to a non-resident.

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.
However, in the case of SoftBank, which purchased its near-21% stake in the online retailer in August last year, a two-year (April 1, 2017 to March 31, 2019) transitional phase, when tax rates will be half India’s domestic rates, could be available. The details of tax withheld for individual sellers weren’t immediately known.

Further, the tax liability from the Walmart-Flipkart deal comes under the ambit of Section 9(1) of the I-T Act, which essentially means that capital gains accruing from transfer of assets located in India would be taxable. 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).

India taxes short-term (held for less than two years) capital gains from unlisted shares at 15%. While long-term (over two years) capital gains are taxed at 20% with indexation, as FE reported last week, some of the sellers had approached the department for a lower withholding tax owing to protection under bilateral treaties.

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