Flipkart deal: Bumpy road ahead for Walmart on tax implications

The American retail giant Walmart has to woo the Indian taxman if it wants to make a smooth entry into the e-commerce business following its stake acquisition in desi Flipkart.

All eyes are on Walmart to see if it will approach the income tax authorities for nil/lower tax withholding order or approach the Authority of Advance Rulings (AAR) for more judicious and definitive ruling on taxability of transaction.

Given the Income Tax Department’s stated position on taxability of “indirect transfers”, the possibility of getting a ‘nil’ withholding tax order by accepting non-taxability of this transaction under a tax treaty appears to be remote, say tax experts.

Walmart may be better off approaching the AAR for definitive ruling on the taxability although one of the drawback of this option is the potential delay in issuance of advance ruling, due to huge pendency of applications already filed in the past years before the authority, they said.

Shailesh Kumar, Director, Nangia & Co LLP said: “Under both options (I-T Department and AAR), ultimately, this issue is expected to be resolved at the High Court/Supreme Court level”. Aseem Chawla, Partner, ASC Legal, a law firm, said AAR being a superior forum — its rulings have a binding effect both on the tax payer and the tax authorities — would help in achieving tax certainty, unlike a Section 195 withholding tax order which is not binding on the Tax Department.

“The AAR, only when it is satisfied that the transaction is not motivated by tax avoidance considerations and is bonafide, takes up a matter for giving a ruling,” Chawla said.

How Walmart will move on the tax front in the Flipkart deal is interesting as the Income Tax Department has already told the retail giant that it can approach tax authorities to ascertain its withholding tax liability.

I-T Dept letter

The I-T Department’s letter was mailed to Walmart on May 8, one day before the $16-billion Flipkart acquisition deal was announced.

It reportedly conveyed to Walmart that the American multinational may have withholding tax liability under the income tax law on payments made under the deal to non-resident investors.

Amit Maheshwari, Partner, Ashok Maheshwary and Associates LLP, a CA firm, said Walmart can go either for a certificate for lower withholding under Section 195(2) or can opt for availing an Advance Ruling under Section 245N of the income tax law.

“A certificate for lower withholding from the tax office is generally a quicker option. However, Authority for Advance Ruling is a judicial authority and one can expect a better result. One risk to the transaction could be that treaty benefit could be denied by invoking GAAR,” Maheshwari told BusinessLine .

Whichever way Walmart prefers to go, one thing is for sure — as a buyer the American multinational would have, in the definitive agreement, ensured that it be indemnified by the seller against future tax liability.

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