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. Photo: Hemant Mishra/Mint
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. Photo: Hemant Mishra/Mint

Flipkart-Walmart deal: Centre likely to net big tax gains, but legal battle looms

Flipkart promoters Sachin and Binny Bansal will likely face a tax liability and so will some other investors

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.

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 e-commerce firm 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 some of the investors will have to 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. He added that the tax rate could be 20-40% for non-residents and 20-30% for resident investors.

However, in case of a direct sale of shares by Flipkart’s parent company in Flipkart India to Walmart, the Singapore parent company could take the benefit of non-taxability of capital gains in India as per India-Singapore tax treaty, but this may be subject to General Anti Avoidance Rules provisions, he pointed out.

Walmart India said it had no specific information to be shared on the tax issue at this juncture, while an email sent to Flipkart remained unanswered as of press time.

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