US-based retail giant Walmart is most likely to encounter an aggressive Indian taxman, who could deny it a certificate of withholding tax waiver over the proposed mega deal to purchase a substantial stake in Flipkart from existing investors in the Indian online retailer. Walmart, tax experts said, could try and obtain a nil-tax-liability order from the Authority for Advance Ruling (AAR) before going ahead with the deal, but even that won\u2019t guarantee that the imminent purchase would not precipitate a high-profile Vodafone-like tax fight. It is also possible that the US major is protected by a commercial indemnity clause, in which case it would be immune to an India tax cost from the deal. At least one or even both of sellers \u2014 Tiger Global and SoftBank \u2014 may cite residency in a treaty-protected country to escape\/reduce a capital gains tax liability here. (In case of a tax liability, the buyer withholds the tax while the burden is on the seller.) As Tiger Global arms are registered in Mauritius\/Singapore and acquired their combined 21% stake in Flipkart before April 1, 2017, they could seek protection under a grandfathering clause in New Delhi's double taxation avoidance agreements with the two countries (the tax waiver is not available to shares purchased post the cut-off date, thanks to amendments to treaties at New Delhi's behest in 2016). 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 the tax rates will be half India\u2019s domestic rates could be available. However, if the Japanese venture capital firm chooses to carry out the stake sale to Walmart via a US-based arm (reports suggest so), the tax relief would not be available to it. If SoftBank indeed takes the US route for the transaction, then it might delay the deal till August 2019, to be the recipient of long-term, rather than short-term capital gains, which is taxed at a higher rate. 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. Under Section 9 (1)(i) of the Income Tax Act, \u201call 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\u201d shall be deemed to accrue or arise in India and is liable for tax. This piece of law was amplified in 2012, after Vodafone episode where the government was caught on then 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). As for the Indian tax authorities, the avenue for tax revenue from the Walmart-Flipkart deal comes from the limitation of benefit clause under the protected tax treaties. An entity claiming residency in Singapore\/Mauritius needs to prove \u201csubstance\u201d in the claim by passing the motive and expenditure tests. The motive test is to prove that the primary purpose of deal (via the treaty protected country) is not to obtain the tax exemption. The expenditure caveat (investment threshold) is relatively easy to surmount. \u201cIf the shareholders are protected by treaty between their country and India which exempts capital gains tax in India realised from shares other than shares of Indian companies, then even where the foreign company derives more than 50% of value from Indian assets, sale of shares of such foreign company in the hands of such shareholders may be protected by the provisions of the relevant applicable treaty,\u201d said Daksha Baxi, partner, Cyril Amarchand Mangaldas. Some analysts also see Flipkart losing the \u201ctax shield\u201d on account of its accumulated losses owing to the proposed deal. Under Section 79 of the I-T Act, carry-forward and set-off of losses in a closely held company shall be allowed only if there is a continuity in the beneficial owner of the shares carrying not less than 51% of the voting power, on the last day of the year or years in which the loss was incurred. As the proposed transaction involves acquisition of more than 60% of Flipkart, in essence, more than 51% of shareholding shall not be beneficially held by same persons. Loss of of the tax shield is something Walmart, as the buyer, has to be worried about and this also makes the case stronger for a delay in sale of stake by SoftBank. In FY16, Flipkart's s loss was Rs 5,223 crore and this rose to Rs 8,771 crore in the subsequent year. \u201cWalmart may perhaps decide to claim the continuance of tax shield thereby opening up litigation at various levels,\u201d said Amit Agarwal, partner, Nangia & Co.