The Income Tax department will seek purchase agreement from Flipkart on the mega e-commerce USD 16 billion buyouts by US retail mammoth Walmart to assess the tax liability and also find out whether the General Avoidance Rule provisions can be invoked as informed by an official related with the matter.
The department id presently is referring to Section 9(1) of the Income Tax Law, which deals with the indirect transfer provisions to seek if the benefits under bilateral tax treaties with countries like Singapore and Mauritius could be availed by foreign investors such as Walmart.
Singapore registered Flipkart Pvt Ltd has majority stakes in Flipkart India. Post definitive agreement between the companies, Walmart will hold 77 percent stake in the Singapore entity for USD 16 billion. The agreement will eventually result in the complete transfer of ownership in Flipkart India to Walmart.
In regard to the applicability of General Anti Avoidance Rules (GAAR), it would be applicable in the cases where investment was made to avoid taxes, the official said.
Tax Department is Seeking Purchase Pact to Ascertain Tax Liability
In the Walmart-Flipkart deal, the revenue department will go through the share purchase agreement to ascertain the purpose of investment and the emanating gains. The department will also consider details of different double taxation avoidance agreements to ascertain whether taxes could be levied at concessional rate and investment made prior to a particular date can be considered.
V Lakshmikumaran, Managing Partner of law firm Lakshmikumaran & Sridharan said,
There is likely to be capital gains withholding tax implications when the shares of Flipkart Singapore are sold by Softbank or other foreign investors. The tax rate will depend upon the facts of the case.
Last week, the tax department had written to Walmart saying the US company can seek guidance about the tax liability under Section 195 (2) of the I-T Act. Under this Act, anyone making payment to non-residents is required to deduct tax which is commonly known as withholding tax.
As per Section 9 (1) of I-T Act dealing with indirect transfer provisions, the value of shares of a foreign company is deemed to be substantially derived from India, if the value of the Indian assets is greater than 50 percent of its worldwide assets — a criteria that are apparently met in Flipkart’s case.
Talking in context of the capital gains made by founders Sachin Bansal and Binny Bansal, the official said they would have to pay 20 percent tax with indexation benefit, which is applicable on sale of unlisted shares by Indian residents.