Flipkart deal set to yield big bonanza for taxman REGULATORY PROBE LIKELY INTO ONLINE DISCOUNTS

Walmart asked for details of capital gains tax deducted from payments within fortnight of sealing deal

NEW DELHI: The income tax department expects US retail giant Walmart to submit details of capital gains taxes deducted from payments for its acquisition of Flipkart within a fortnight of closing the $16 billion deal, a senior tax official said.

The Competition Commission of India on Wednesday approved the deal, paving the way for its completion.

Though both Walmart and Singapore-registered Flipkart are non-resident entities, the deal will 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 some of the investors will have to pay tax for the capital gains accruing to them from the proceeds of the deal.

Walmart, as a buyer, has to withhold tax while making payments to sellers under Section 197 of the Income Tax Act. The company, on 9 May, announced that it will pay approximately $16 billion for a 77% stake in India’s largest online retailer.

Flipkart has an array of domestic and foreign investors, who will make large capital gains from selling their shares in the company. They will be liable to be taxed in India, with the onus on Walmart to deduct the tax before making the payments to the sellers.

The official said Flipkart has already shared the share purchase agreement, which the tax department is examining.

“We expect Walmart to submit the details within a fortnight of closing the deal. The department will approach Walmart if the company does not revert

within a reasonable frame of time with the withholding tax certificates,” the official added on condition of anonymity.

The tax department will scrutinize the jurisdictions from which these investments were routed and the taxation treaty clauses, including the limitation of benefits clause.

Walmart has already said it takes it legal obligations seriously, including the payment of taxes to governments where it operates.

“We will continue to work with Indian tax authorities to respond to their inquiries,” it said in a statement.

Meanwhile, Flipkart’s largest shareholder, SoftBank Group, will have to bear a large tax burden due to substantial

gains from exiting the $2.5 billion investment it made in August last year.

SoftBank said earlier this week that a tax effect was recognized for unrealized valuation gain in Flipkart, and deferred tax of ¥71.7 billion (about ₹4,432 crore) was recorded. “The company estimates that the sale of Flipkart shares will occur within 24 months of the inception of the investment and has calculated the deferred tax at 43.68%, being the Indian shortterm capital gains tax rate expected to apply to the sale of Flipkart shares,” the company said.

The tax official quoted before, however, said that SoftBank is yet to reach out to the department. BENGALURU/NEWDELHI: The observations by the Competition Commission of India (CCI) on Flipkart’s discounting practices may trigger a regulatory probe of all online marketplaces that rely on discounts to attract customers.

On Wednesday, CCI approved Walmart’s $16 billion acquisition of Flipkart but the antitrust regulator stopped short of asking for a probe of discounting practices of online retailers.

CCI’s order included an observation that Flipkart and other online retailers were discounting on their platforms—a practice that is explicitly banned. In March 2016, India allowed 100% foreign direct investment (FDI) in online retail of goods and services under the “marketplace model” through the automatic route, but it banned online marketplaces from influencing product prices directly or indirectly.

These platforms say the discounts are offered by third-party sellers. CCI, which thinks otherwise, used strong language to denounce the discounting practices and the supplier relationships of Flipkart in its order on Wednesday.

“The issues concerning FDI policy would need to be addressed in that policy space to ensure that online market platforms remain a true marketplace providing access to all retailers,” CCI said in its order, referring to complaints by small traders against the deal.