Ease of doing business? 22 months after Walmart bought Flipkart the tax on the deal is still unclear

FILE - This June 25, 2019, file photo shows the entrance to a Walmart in Pittsburgh. Walmart is reporting disappointing fourth-quarter profits and sales. The nation's largest retailer says that sales at its U.S. stores heading into the holiday season were weaker than expected. It also said that social unrest in Chile hurt its business.Photo/Gene J. Puskar, File)
  • Walmart had acquired a 77% stake in Flipkart for a whopping $16 billion in 2018.
  • Walmart had paid a withholding tax of ₹7,439 crore for the 10 major shareholders of Flipkart who exited back then.
  • But now foreign investors have moved the Authority of Advance Rulings (AAR) to get more clarity on the taxability of the capital gains on the deal.
Walmart bought Flipkart in May 2018. Now, 22 months later, the investors who sold their shares in Flipkart are seeking clarity on the tax deducted for the profit they made from the deal from Authority of Advance Rulings (AAR).

Walmart had acquired a 77% stake in Flipkart for a whopping $16 billion in 2018, making it one of the biggest e-commerce deals in the world. The firms which had exited from Flipkart were SoftBank, Nexus, Accel Partners, eBay among others.

While the American retail giant paid a withholding tax of ₹7,439 crore to buy out the ten major shareholders of Flipkart, it had reportedly not paid taxes for the 34 other smaller investors. "The authority has taken up some of the cases this month itself and may take four to five months to get a final order on the matter," said a tax official told Business Standard.

What is withholding tax?

The buyer (in this case, Walmart) is supposed to set aside 20% (in case of long-term capital gains) of the money to be paid to the seller as withholding and transfer it to the government. The amount is deducted from the payment to the recipient (in this case, the major shareholders of Flipkart who exited from the deal).

The tax rate could be lower in case the non-resident seller invokes the provision of the double tax avoidance agreement.

Walmart has already deducted, and paid the government, ₹7,439 crore by way of withholding tax.

What do the former investors of Flipkart want?

Lower tax deduction certificates. It enables non-residents to ensure that tax is deducted not on the sale price but on their taxable capital gains arising from such sale. Essentially, the tax on the seller will be lower.

What is the process to be followed now?

Foreign firms have been asked to file tax returns so that they can claim refunds if there is merit in their argument.

What is the issue?

It’s been 22 months since the deal was struck but lack of clear policy has left foreign investors wondering. Making matters worse, as the official reportedly said, it may take another 4-5 months for the matter to settle. So much for boosting India's ease of doing business.

See Also:
Amazon, Flipkart get 2-month relief from Karnataka High Court over a CCI investigation
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