Flipkart Deal: Tax Dept to Act Once Walmart Obtains Regulatory Nod

Walmart Inc on 9 May announced that it would pay $16 billion for an initial stake of approximately 77 percent in e-commerce company Flipkart.

(Photo: iStock)

E-commerce major Flipkart has shared some details with the income tax authorities on its $16 billion deal with US-based Walmart, but the Income Tax Department will act only after regulatory approvals have been obtained, an official said.

The department is currently studying the details received from the company, the official said, adding that they can issue notices seeking details of taxes withheld once the transactions are completed.

Last month, the tax department had written to Bentonville, Arkansas-based Walmart saying that the US company can seek guidance about the tax liability under Section 195 (2) of the Income Tax Act.

Under Section 195 of the Act, anyone making payment to non-residents is required to deduct tax (commonly known as withholding tax).

The official said Flipkart has filed some details with the tax authorities and the same are being examined.

“There is no action required right now on our part. We will wait till the regulatory clearances are obtained,” the official told PTI.

Nangia Advisors LLP managing partner Rakesh Nangia said the Income Tax Department has the power to issue notices under Section 133(6) of the IT Act to any party involved in this mega-deal, including Flipkart, Walmart or any of the investors selling their stake.

If the department is not satisfied with the reply or explanation furnished by the purchaser or payer, it may hold the purchaser or payer as ‘assessee in default’ for failure to withhold appropriate taxes under Section 195 of the Act. 

Rakesh Nangia

The department currently is going through the Section 9 (1) of the Income Tax law, 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 majority stake in Flipkart India.

Walmart had, on 9 May, announced that it would pay about $16 billion to buy about 77 percent stake in Flipkart. Significant shareholders in the Bengaluru-based company like SoftBank, Naspers, venture fund Accel Partners and eBay has agreed to sell their shares, as well as Sachin Bansal.

Experts, however, said that the only regulatory clearance that the deal would need is from the Competition Commission of India.

According to V Lakshmikumaran, Managing Partner of law firm Lakshmikumaran & Sridharan, “Under Section 6 of the Competition Act, the Walmart will have to seek clearance from the CCI as it is going to be a major player in the e-commerce sector.”

Besides, Walmart will also have to adhere to the guideline of the Commerce Ministry on marketplace model of e-commerce which allows 100 percent foreign direct investment under automatic route, he said.

As per the Department of Industrial Policy and Promotion guidelines, marketplace model means providing an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between a buyer and seller.

E-commerce marketplaces are permitted to provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centre, payment collection and other services. However, such entities will not exercise ownership over the inventory.

Regulatory clearances have become important in the wake of complaints filed by RSS-affiliate Swadeshi Jagran Manch (SJM) to the DIPP alleging that US retail giant Walmart was "circumventing" rules for a "back-door entry" into India.

The DIPP has referred SJM’s complaint to the ED, Reserve Bank, CCI and the Income Tax Department.

Besides, traders body CAIT, too, have complained to the Enforcement Directorate for alleged violation of the government's FDI policy. It has also approached the CCI saying that the deal will create unfair competition and an uneven level playing field for domestic players.