Tax thorns haunt Walmart-Flipkart deal, foreign shareholders want clarity

Tax-related issues are cropping up in the Walmart-Flipkart deal even almost two years after the transaction was done. 

A clutch of foreign firms who were shareholders in Sachin Bansal and Binny Bansal-founded Flipkart have moved the Authority of Advance Rulings (AAR) to seek clarity on the taxability of the capital gains arising out of the $16-billion deal struck in May 2018. 

American retail major Walmart reportedly deducted taxes from Flipkart's foreign shareholders including SoftBank, Naspers and Accel Partners to pay withholding tax to the government for capital gains made by these entities. A withholding tax, or a retention tax, is an income tax to be paid to the government by the payer of the income rather than by the recipient. The tax is thus withheld or deducted from the income due to the recipient. 

AAR is a legally constituted body whose ruling is binding on the applicant as well as government authorities. Under the Income-tax Act, a foreign company or the Indian taxpayer can approach AAR and obtain a ruling on the taxability of the proposed transaction in India. "The authority has taken up some of the cases this month itself and may take four to five months to get a final order on the matter," said a tax official aware of the development. 

A SoftBank spokesperson declined to comment, while email questionnaires sent to Accel and Walmart on Tuesday did not elicit any response. 

Although some of the foreign investors of Flipkart had sought a lower deduction certificate under Section 197 of the I-T Act from the tax department, a few cases got rejected and others are under consideration.

The I-T provision provides for a buyer to seek a withholding tax certificate from authorities after providing details of the transaction and make a case for availing lower or nil tax rates. The tax rate could be lower in case the non-resident seller invokes the provision of the double tax avoidance agreement. 
 

"This mechanism for obtaining lower deduction certificate enables non-residents to ensure that tax is deducted not on the sale price but on their taxable capital gains arising from such sale. In that case, an applicant can seek a certificate which could result in lower quantum of tax being withheld," explained a tax official privy to the development. 

Sources said applications had been vetted by assessing officers but in many cases there was no merit in the arguments. However, the companies, especially foreign firms, have been asked to file tax returns so that they can claim refunds if they believe their tax liability is less than the amount being deducted, according to another source. 

In September 2018, Walmart paid Rs 7,439 crore withholding tax to the Indian tax authorities on payments made to 10 major shareholders of Flipkart. 

A total of 44 shareholders had exited the Indian e-commerce company in the Walmart-Flipkart deal. 

The tax issue came into the spotlight soon after the official announcement of Walmart and Flipkart transaction in May 2018. The US firm had acquired 77 per cent stake in Flipkart.