Flipkart-Walmart deal: Sachin Bansal pays Rs 699 cr advance tax for Q1 FY19; Binny Bansal yet to disclose capital gains

In May, Bentonville, Arkansas-based Walmart Inc acquired 77 percent stake in Flipkart for about $16 billion in its biggest acquisition till date.

FP Staff January 02, 2019 11:52:25 IST
Flipkart-Walmart deal: Sachin Bansal pays Rs 699 cr advance tax for Q1 FY19; Binny Bansal yet to disclose capital gains

After Flipkart founders Sachin Bansal and Binny Bansal got notices from the Income Tax Department recently, Sachin Bansal has deposited Rs 699 crore as advance tax, including his capital gains tax from the Flipkart-Walmart deal, for Q1 FY19, according to media reports.

His partner and co-founder Binny Bansal is yet to disclose the capital gains made of $16 bn sale to Walmart, sources in the tax department said, according to a Times of India report said.

In November, the I-T department had asked the Bansals to disclose their total income from the sale of Flipkart to Walmart and also to report the capital gains, the TOI had reported earlier.

In May, Bentonville, Arkansas-based Walmart Inc acquired 77 percent stake in Flipkart for about $16 billion in its biggest acquisition till date. The deal valued the 11-year old Indian e-commerce firm at $20.8 billion.

Under Section 195 of the I-T Act, anyone making payment to non-residents is required to deduct tax (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 per cent of its worldwide assets -- a criteria that is apparently met in Flipkart's case.

Walmart paid Rs 7,439 crore tax on payments it made to buy out shares of 10 major shareholders of Flipkart in September but has not yet done so for another 34 who exited the Indian e-commerce company in the $16 billion deal, tax officials said.

"Of the 44 shareholders in Flipkart who have sold shares, Walmart has deposited taxes for only 10 funds and entities. We have asked Walmart to explain the rationale followed while deducting or not deducting taxes from the shareholders. They have been asked to give a case to case explanation," a tax department official said.

As many as 44 shareholders of Flipkart, including significant ones like SoftBank, Naspers, venture fund Accel Partners and eBay, had sold their holdings to Walmart.

Withholding tax, or retention tax, is an income tax to be paid to the government by the payer of the income rather than the recipient of the income. The tax is withheld or deducted from the income due to the recipient.

FlipkartWalmart deal Sachin Bansal pays Rs 699 cr advance tax for Q1 FY19 Binny Bansal yet to disclose capital gains

Sachin Bansal, co-founder, Flipkart. File photo. Reuters

In case of the Walmart-Flipkart deal, the withholding tax pertains to the capital gains made by the shareholders of Flipkart.

Responding to an e-mail query by PTI, a Walmart spokesperson said: "We take our legal obligations seriously, including paying taxes to governments where we operate."

"Following our Flipkart investment, we have completed our tax withholding obligations under the guidance of the Indian Tax authorities. We will continue to work with authorities to respond to their queries," the spokesperson said without elaborating.

Industry sources said Walmart may have followed the withholding tax provision for small investors in not deducting tax on payments made to them.

Flipkart shareholders can broadly be divided into three categories -- foreign investors whose holding is more than 5 percent, foreign investors with holding less than 5 percent and Indian residents.

Walmart is legally not required to withhold tax on payments made to foreign shareholders with a stake of less than 5 percent and no right to management, they said.

Nangia Advisors LLP Managing Partner Rakesh Nangia said I-T Act's Section 9(1)(i) read with Explanation 5 and 6, that is the Indirect Transfer Provisions, impose capital gain tax liability on the foreign shareholder holding shares in Flipkart Singapore.

However, Explanation 7 to Section 9(1)(i) carves out the applicability of Explanation 5 to small investors holding no right of management or control of such company and holding less than 5 percent of the voting power/ share capital/ interest of the company that directly or indirectly owns the assets situated in India.

"It is imperative to note that Walmart's liability to withhold tax arises only if the underlying capital gain is liable to tax in the hands of the shareholder under the provisions of the Act read with the relevant tax treaty.

Accordingly, there is a possibility that some of the shareholders fall within the ambit of Explanation 7, thereby absolving Walmart of any liability to withhold tax at source," Nangia said.

Certain shareholders of Flipkart had last month approached the tax department seeking exemption from levy of the taxes. Their application is still being studied by the I-T department.

"We are still studying the exemption application filed by some shareholders of Flipkart. We have not yet decided on granting or not granting exemption or lower tax rate for them," the official said.

The Income Tax law provides for a buyer to seek withholding tax certificate from authorities after providing details of the transaction and make a case for availing lower or nil tax rates. The tax rate could be lower in case the non-resident seller invokes the provision of the double tax avoidance agreement.

US retail giant Walmart Inc had on 7 September said it has complied with the tax obligations of its $16 billion acquisition of Flipkart but did not say the quantum of taxes it paid.

Walmart had completed the acquisition of 77 percent stake in Flipkart for about $16 billion in mid-August. As per the provisions of the I-T law, Walmart had to deduct withholding tax on payments made to sellers and deposit it with the Indian authorities on the seventh day of the subsequent month, which in this case was 7 September.

As per domestic tax law, long-term capital gains tax is levied at 20 percent for shares sold by foreign investors after 24 months of purchase.

However, the I-T law also provides for a taxpayer to pay taxes at a lower or nil rate if he is eligible to claim the benefits under the double taxation avoidance agreement between India and the country from where the investment was routed.

--With PTI inputs

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