New Delhi: US-based retailer Walmart Inc. has paid ₹ 7,439 crore tax on payments it made to buy out shares of 10 major shareholders of Flipkart but hasn’t yet done so for another 34 who exited the Indian e-commerce company in the $16 billion deal, tax officials have said.
As many as 44 shareholders of Flipkart, including significant ones such as SoftBank Group Corp., Naspers Ltd, venture fund Accel Partners LP and eBay Inc., had sold their holdings to Walmart.
On 7 September, the last date for depositing taxes, Walmart paid ₹ 7,439 crore withholding tax on payments made to 10 shareholders of Flipkart. “Of the 44 shareholders in Flipkart who have sold shares, Walmart has deposited taxes for only 10 funds and entities. We have asked Walmart to explain the rationale followed while deducting or not deducting taxes from the shareholders. They have been asked to give a case to case explanation," a tax department official said.
Withholding tax, or retention tax, is an income tax to be paid to the government by the payer of the income rather than the recipient of the income. The tax is withheld or deducted from the income due to the recipient. In case of the Flipkart-Walmart deal, the withholding tax pertains to the capital gains made by the shareholders of Flipkart.
Responding to an email query by PTI, a Walmart spokesperson said: “We take our legal obligations seriously, including paying taxes to governments where we operate."
“Following our Flipkart investment, we have completed our tax withholding obligations under the guidance of the Indian tax authorities. We will continue to work with authorities to respond to their queries," the spokesperson said without elaborating.
Walmart may have followed the withholding tax provision for small investors in not deducting tax on payments made to them. Flipkart shareholders can broadly be divided into three categories: foreign investors whose holding is more than 5%, foreign investors with holding less than 5% and Indian residents. Walmart is legally not required to withhold tax on payments made to foreign shareholders with a stake of less than 5% and no right to management, they said.
Nangia Advisors LLP managing partner Rakesh Nangia said the Income Tax Act’s Section 9 (1)(i) read with Explanation 5 and 6, that is the Indirect Transfer Provisions, impose capital gain tax liability on the foreign shareholder holding shares in Flipkart Singapore. However, Explanation 7 to Section 9 (1)(i) carves out the applicability of Explanation 5 to small investors holding no right of management or control of such company and holding less than 5% of the voting power/ share capital/ interest of the company that directly or indirectly owns the assets situated in India.
“It is imperative to note that Walmart’s liability to withhold tax arises only if the underlying capital gain is liable to tax in the hands of the shareholder under the provisions of the Income Tax Act read with the relevant tax treaty. Accordingly, there is a possibility that some of the shareholders fall within the ambit of Explanation 7, thereby absolving Walmart of any liability to withhold tax at source," Nangia said.
Certain shareholders of Flipkart had last month approached the tax department seeking exemption from levy of the taxes. Their application is still being studied by the I-T department.
“We are still studying the exemption application filed by some shareholders of Flipkart. We have not yet decided on granting or not granting exemption or lower tax rate for them," one of the tax official quoted above said.
India’s tax laws provide for a buyer to seek 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.
Walmart had on 7 September said it has complied with tax obligations of its $16 billion acquisition of Flipkart but did not specify the quantum of taxes paid. Walmart had completed the acquisition of 77 per cent stake in Flipkart for about $16 billion in mid-August.
According to the provisions of the income tax law, Walmart had to deduct withholding tax on payments made to sellers and deposit it with the Indian authorities on the seventh day of the subsequent month, which in this case is 7 September. Long-term capital gains tax (LTCG) is levied at 20% for shares sold by foreign investors after 24 months of purchase. However, the I-T law also provides for a taxpayer to pay taxes at a lower or nil rate if he is eligible to claim the benefits under double taxation avoidance agreement between India and the country from where the investment was routed.
The I-T department has been reviewing Section 9 (1) of the Income Tax Act, which deals with indirect transfer provisions, to see if the benefits under the bilateral tax treaties with countries like Singapore and Mauritius could be available for foreign investors selling stakes to Walmart.
Singapore-registered Flipkart Pvt. Ltd holds a majority stake in Flipkart India.