Legal battle looms over tax demands

NEW DELHI: US retail giant Walmart’s buyout of Flipkart is likely to net the Indian tax department a windfall, though the process could stretch out and possibly land in litigation.

In order to make sure the parties involved pay their fair share of taxes, the Income Tax Department has already “sensitized” them about the provisions of law regarding tax implications, a finance ministry official said on condition of anonymity, adding the parties involved have been advised to seek determination of non-residents’ income that is taxable in India, on which tax is liable to be withheld.

Tax experts said that with capital gains accruing to non-resident and resident investors, the taxmen could get substantial tax proceeds, though the final tax liability may depend on the way the transaction is structured. On Wednesday, Walmart announced that it will pick up a 77% stake in Flipkart for $16 billion, valuing the online e-commerce giant at $21 billion.

Though both Walmart and Singapore-registered Flipkart are non-resident entities, the deal is likely to attract indirect transfer provisions under Section 9 of the Income Tax Act as more than 50% of the underlying assets are in India. This means that some of the investors in the online retailer firm will have to Tax department ‘sensitizes’ stakeholders about possible tax implications

Experts say the deal is likely to trigger indirect transfer provisions for capital gains tax Capital gains tax could be 20-40% for non-resident investors, 20-30% for resident investors

pay tax for the capital gains accruing to them from the proceeds of the deal.

As per the deal, Flipkart’s largest shareholder Softbank will completely exit the business, and may bear the heaviest tax burden as it makes substantial gains from exiting the $2.5 billion investment it made in August last year. Promoters Sachin Bansal and Binny Bansal will also face a tax liability and so will some other investors who will either reduce their holdings or completely exit the investment.

Nitesh Mehta, partner, transaction tax, at BDO India said Walmart will have the onus of withholding taxes as per Indian laws before making payments to investors. Mehta said in case the investors sell their shares in Flipkart’s Singapore parent company to Walmart, it would trigger capital gains tax under the indirect transfer provision, subject to tax treaty benefits.