There is a windfall awaiting the taxman next week. The buzz is that the Income Tax department stands to make a whopping $2 billion from the $16 billion Walmart-Flipkart deal. And given that the tax rules specify the due date for payment of tax deducted/collected at source as the seventh day of the next month, the deadline for Walmart to file the withholding tax certificate is September 7.
Citing a senior tax official, The Indian Express reported that some of the investors who recently exited Flipkart have approached the income tax authorities ahead of the deadline to ascertain their final tax liability. The ex-stakeholders are exploring grounds for a lower withholding tax rate, especially if any bilateral tax treaties are applicable.
The official declined to name any names, but the list of foreign investors who made an exit is well-known. US-based firms Tiger Global Management, Accel Partners and eBay, South Africa's Naspers Ltd, China's Tencent Holdings and Japan's SoftBank have all made huge profits from this deal.
Under Section 197 of the Income Tax Act, certain taxpayers selling shares can give reasons to Indian authorities as to why they should be taxed at a lower or nil rate in India. An assessing officer can give certificate for such lower rate, if the officer is satisfied that the existing and estimated tax liability of a person will be lower and the assessee provides sufficient grounds for the same.
"Sellers, especially non-resident sellers, can approach for a lower rate of withholding tax. Say, those in Singapore could get grandfathering benefits under the Singapore-India DTAA since the investments precede 2017 when the treaty was amended," Amit Agarwal, partner, Tax and Transfer Pricing, Nangia & Co, told the daily.
"Also, if the seller is US-based, then they can approach tax authorities for a lower withholding tax rate of 10% without indexation benefit. If the assessing officer finds sufficient grounds for lower tax rate, the buyer [Walmart] will then have to honour the lower rate withholding tax certificate obtained by the seller from the tax authorities," Agarwal added.
Given that Flipkart's parent is registered in Singapore and many of the investors who sold their stake in the company to Walmart are non-residents, Section 197 is certainly going to be relied upon in the days to come. Significantly, if such a certificate is issued, the Beast of Bentonville will have to deduct income tax at the rates specified therein - or zero tax as the case may be - until the certificate is cancelled by the assessing officer.
Back in May, the tax authorities had reportedly also communicated to Walmart that Section 9 (1) and Section 195 would also apply on the deal. The former, dealing with indirect transfer provisions, specifies that the value of shares of a foreign company is deemed to be substantially derived from India, if the value of the Indian assets is greater than 50% of its worldwide assets. And under Section 195 of the Act, anyone making payment to non-residents is required to deduct tax, commonly known as withholding tax.
Above all else, the government wants to avoid a repeat of the protracted battle over the Hutchison-Vodafone deal. To remind you, in February 2007, Britain's Vodafone had acquired a 67 per cent stake in Hutchison Essar from Hong Kong-based Hutchison Group for $11.2 billion through a maze of subsidiaries based in the Netherlands and Cayman Islands. No tax was paid on this deal to Indian authorities since the transaction involved companies located overseas.
However, seven months after starting its India operations, Vodafone was held liable for capital gains tax on the deal and the taxman demanded Rs 11,000 crore. The matter went to court and the Supreme Court ruled in Vodafone's favour, saying it was not liable to pay any tax over the acquisition of assets in India from the Hong Kong-based Hutchison.
Not to be outdone, the government then amended the Income Tax Act in 2012 to be able to retrospectively tax any transfer of shares between two non-resident entities that results in indirect transfer of assets in India. The case is still under arbitration.
With PTI inputs
Edited By Sushmita Choudhury Agarwal