Softbank has finally declared that it is going to sell 21% of its Flipkart shares to Walmart as part of $16 billion deal. The income tax department is eagerly waiting for the Walmart-Flipkart deal to get closed and as per the views of some experts in the department, it is said that Softbank’s deal with Walmart will also fall under the ambit of tax liability.
The double taxation avoidance treaties with various jurisdictions will also come into the picture. An official expressed “We will have to see 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.”
Walmart had stated that it would take over Flipkart, which is India’s largest e-commerce company for $16 billion. SoftBank CEO Masayoshi Son was hesitant to sell his 21% stake to Walmart as part of the deal due to the considerable tax burden. Experts say that a large part of Masayoshi Son’s $4 billion could end up as a tax liability .
The tax department had written a letter to Walmart “sensitising” them about the current requirements and had also briefed them that they can get their tax liability computed under Section 195 (2) and other provisions as well.
Short-term capital gains tax that is in the hands of foreign investors is 40 percent but long-term capital gains tax is lower.
An official stated that “We have apprised them of the exact provisions of the law and several other clauses also Section 9 (1), section 5 apart section 195 (2). They can get their geable 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 withholding tax they may have to provide on what they have disclosed so far. Now the Softbank deal with Walmart will also come under liability.”
According to tax expert Abhishek Rastogi section 9(1)(i) of the I-T Act, any growth in income taking place directly or indirectly, inter-alia, through the transfer of a capital asset that is located in India, is supposed to grow or arise in India.
In cases of indirect transfer, the withholding tax would vary between 10-40 percent based on the type of transfer and in some irregular situations of full tax indemnity. The actual amount of withholding tax can be known only after getting hold of the filings in the public sector and considering international tax exemption treaties. The total tax impact could be around $1.6-$6.4 billion.
The maximum number of shares of Singapore-registered Flipkart Pvt Ltd is in Flipkart India. As per the definitive agreement between the companies, Walmart will purchase about 77 percent stake in the Singapore entity for $16 billion resulting in the direct transfer of ownership in Flipkart India to Walmart.
This agreement calls for Section 9(1) of the Income Tax law, which deals with indirect transfer provisions, but needs a clarification if the benefits under the bilateral tax treaties with countries such as Singapore and Mauritius, could be given to foreign investors selling stakes to Walmart. SoftBank’s fund is inventoried in Jersey, USA. There is no provision of Double Taxation Avoidance Agreement (DTAA).