Walmart's proposed $16-billion majority stake acquisition in Flipkart is still awaiting the green signal from the Competition Commission of India (CCI) amid growing protests by trader organisations. But the taxman is already circling in. In fact, the Income Tax Department had reportedly written to both parties earlier this year - even before the deal was formally announced - seeking details of the transaction.
According to The Economic Times, Flipkart had responded to the department in May itself, and now the US brick-and-mortar behemoth has followed suit. "They have said whatever is the regulatory requirement they will fulfil," an official aware of the development told the daily. Walmart reportedly added that it will get the tax implication of the deal examined.
"We take seriously our legal obligations, including the payment of taxes to governments where we operate," a Walmart spokesperson told the daily, adding, "We will continue to work with Indian tax authorities to respond to their inquiries."
The mega deal is getting heightened scrutiny because of the different types of taxes applicable on it as well as the ambiguity created by last year's changes to applicable bilateral tax treaties. Further complicating matters is the fact 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.
The daily had previously pointed out that the tax department's letter to Walmart not only sought details about the transaction but also intended to inform the company about Indian tax laws, including those on indirect transfers, and offer assistance, if needed, in determining the tax liability.
The taxman anticipates that provisions relating to withholding tax will come into play in this deal. Currently, the withholding tax rate in the case of long-term capital gains tax is reportedly around 10-20 per cent, depending on the nature of the investment.
The daily added that subsequent to the amendment on indirect transfers introduced as part of the 2012 Budget, it is mandatory for all entities - resident and non-resident - having a business connection in India to withhold tax. This holds true even if a transaction is executed on foreign soil in cases where the underlying asset is Indian.
This amendment followed the high-profile case that Vodafone won in the Supreme Court in 2012. In February 2007, Britain's Vodafone had shelled out $11 billion for a 67 per cent stake in Hutchison Essar. The holding company for Hutchison Essar was registered in Cayman Islands. Seven months after starting its India operations, Vodafone was held liable for capital gains tax on the Hutch Essar deal and the taxman demanded Rs 11,000 crore.
The matter went to court and the apex 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.