IT department await final print of Flipkart deal

New Delhi: Softbank has announced its decision to sell 21 per cent stake in Flipkart to Walmart as part of USD 16 billion deal.

The income tax department, waiting for the Walmart-Flipkart deal to close with a finality, thinks Softbank decision to sell its stake is also liable to taxation, according to people in the know of the development.

The double taxation avoidance treaties with various jurisdictions will also come into play. “So, we will have to see under what clause they are covered. So, we are not going to cover everyone in the same clause. Let us get the deal final picture and papers first on details of each transaction made,” said an official.

The announcement of Softbank clears the uncertainty whether SoftBank CEO Masayoshi Son would actually exit the online marketplace or not. Walmart had said earlier this month said that it would take control of Flipkart, India’s largest e-commerce company, for USD 16 billion. Son had wavered on whether to sell his Vision Fund’s 21 per cent stake to Walmart as part of the deal.

Son’s indecisiveness had reportedly stemmed from two factors - the significant tax liability involved was one of them. Experts say a big chunk of Son's $4 billion could end up as taxes.

Short-term capital gains tax in the hands of foreign investors is 40 per cent while long-term capital gains tax is lower.

The tax department, has already written a letter to Walmart "sensitising" them about the extant provisions and offered them the assistance that they can get their tax liability computed under Section 195 (2) and other provisions as well.

“We have apprised them the exant provisions of the law and several other clauses also -- Section 9 (1), section 5 apart from section 195 (2).  They can get their chargeable income determined by that section 195 (2) and also covered by various applicable sections. But at the moment they must come forward to know the process and quantum of the witholding tax they may have to provide on what they have discloed so far. Now the Softbank deal with Walmart will also come under liability,” an official said.

Tax expert Abhishek Rastogi says as per Section 9(1)(i) of the IT Act, any income accruing or arising, whether directly or indirectly, inter-alia, through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.

The withholding tax in cases of such indirect transfers might vary from 10-40 per cent, depending on the exact nature of transfer with some exceptional situations of full tax exemptions.

The overall tax impact could be approximately USD 1.6-USD 6.4 billion. The exact withholding tax figures will be clear only once the acquisition filings come in the public domain and after factoring international tax exemption treaties.

Singapore-registered Flipkart Pvt Ltd holds majority stake in Flipkart India. As per the definitive agreement between the companies, Walmart will acquire about 77 per cent stake in the Singapore entity for USD 16 billion. The agreement will effectively result in transfer of ultimate ownership in Flipkart India to Walmart.

This attracts Section 9(1) of the Income Tax law, which deals with indirect transfer provisions, but will have to be seen if the benefits under the bilateral tax treaties with countries like Singapore and Mauritius, could be available for foreign investors selling stakes to Walmart. SoftBank's fund is registered in Jersey, USA, there is no Double Taxation Avoidance Agreement (DTAA).