US retail giant Walmart has submitted to Income Tax authorities its rationale for deducting tax on payments made to some Flipkart shareholders and not to others, a senior official said on Wednesday.
Income Tax authorities, which had previously asked Walmart to explain the logic behind its tax deductions on the $16 billion Flipkart deal, have the option to seek more clarifications from the US retailer once they study the reply.
Walmart on September 7 paid Rs 7,439 crore tax on payments it made to buy out shares of 10 major shareholders of Flipkart but had not done so for another 34 who exited the Indian e-commerce company in the $16 billion deal.
As many as 44 shareholders of Flipkart, including significant ones like SoftBank, Naspers, venture fund Accel Partners and eBay, sold their holdings to Walmart.
Individual shareholdings in Flipkart and those who offloaded the stake have not been publicly declared either by the seller or the buyer.
After Walmart deposited Rs 7,439 crore tax, the tax department asked Walmart to explain the rationale followed while deducting or not deducting taxes from Flipkart shareholders.
Walmart has now replied to I-T authorities reasoning out the basis of tax deduction, the official told PTI here. "We are studying their response."
The I-T department may reach out to the shareholder directly or may write to Walmart once again if it is unsatisfied with the response.
"The next course of action would depend on case to case basis," the official added.
Withholding tax, or retention tax, is an income tax to be paid to the government by the payer of the income rather than by the recipient of the income. The tax is withheld or deducted from the income due to the recipient.
In case of Walmart-Flipkart deal, the withholding tax pertains to the capital gains made by the shareholders of Flipkart.
Nangia Advisors LLP Managing Partner Rakesh Nangia said Section 133C of the I-T Act empowers tax authorities to issue notice to any person to furnish information or documents for verification of the information already in its possession.
"Hence based on the information available with the tax authorities about the shareholders of Flipkart, a notice can be issued to them for verification of such information," Nangia said.
Further, section 131(1A), where the tax authorities suspect that the shareholders are liable to Capital Gain tax in India, they may issue a notice to such shareholders, Nangia added.
Flipkart shareholders can broadly be divided into three categories -- foreign investors whose holding is more than 5 per cent, foreign investors whose holding is less than 5 per cent and Indian residents.
Walmart is legally not required to withhold tax on payments made to foreign shareholders with a stake of less than 5 per cent and no right to management, experts said.
Certain shareholders of Flipkart had in August approached the tax department seeking exemption from levy of the taxes, the application is still being studied by the I-T department.
The Income Tax law provides 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 Inc on September 7 said it has complied with the tax obligations of its $16 billion acquisition of India's largest online retailer Flipkart but did not say the quantum of taxes it paid.
Walmart Inc completed the acquisition of 77 per cent stake in Flipkart for about $16 billion in mid-August. As per the provisions of the I-T 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 was September 7.
As per domestic tax law, long-term capital gains tax is levied at 20 per cent 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 the 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 I-T 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.