34 among 44 sellers of e-tailer’s shares sought cover under Section 9 (1) to avoid capital gains tax
With all but ten of the 44 entities that sold their Flipkart shares to Walmart using a provision in India’s Income Tax Act to avoid paying capital gains tax, a concerned tax department has asked the US-based retail giant to explain what discretionary methodology was employed by it in meeting its legal obligation to withhold tax while making payments to these firms.
Official sources told FE that Walmart paid only about Rs 7,450 crore to the tax department as “withholding tax” by the September 7 deadline; this was even as the deal’s size was a massive $16 billion and long-term capital gains by foreign entities are taxed at 20% here, unless protected by certain bilateral tax treaties.
FE has learnt that Walmart did not withhold taxes from the 34 entities by resorting to Section 9 of the I-T Act. According to the explanation 7 under Section 9 (1), no income would accrue to a non-resident from transfer of any share, “if such company (which) directly owns the assets situated in India…neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, as the case may be, of such company or entity”.
While major shareholders like SoftBank, Napsers, eBay, venture fund Accel Partners exceeded the threshold, others apparently did not. But the tax officials want Walmart to explain the eligibility of each of the other sellers to avoid the tax, the sources added.
“The (tax) amount may look small compared to the deal value but the law provides for exemption to those with less than 5% stake as they don’t have any management rights in the company in case of indirect transfer of shares,” an official said. He added that while the department doesn’t hold any opinion on the matter, it would still study Walmart’s approach to tax deductions.
According to I-T Act, long-term capital gains tax is levied at 20% for shares sold by foreign investors in India (indirect transfer of Indian assets). However, the law also allows a lower or even a nil rate of tax if the taxpayers (foreign residents) are covered under certain double taxation avoidance agreement between India and the country from where the investment has been made.
Among the sellers of Flipkart stakes, Tiger Global arms are registered in Mauritius/Singapore. Since they acquired their combined 21% stake in Flipkart before April 1, 2017, they could have sought protection under a grandfathering clause in New Delhi’s double taxation avoidance agreements with the two countries ( tax waiver is still available to shares purchased post the cut-off date though these treaties were amended at New Delhi’s behest in 2016 to remove these exemptions effective April 1, 2019). However, tax officials haven’t confirmed this.
If the seller is an Indian resident, the long-term capital tax for unlisted shares (as of Flipkart) is again 20%.
Walmart Inc had on September 7 said it has complied with the tax obligations of its acquisition of the homegrown e-tailer Flipkart but did not reveal the quantum of taxes it paid. Walmart had completed the acquisition of 77% stake in Flipkart in mid-August.