Soon after the Flipkart-Walmart deal, the Income Tax department is examining the deal and has sought responses from Flipkart to examine tax liability.
To recall, Walmart has agreed to purchase 77% of Flipkartâ€™s ownership for a consideration of $16 billion. There are complications as far as the tax part is concerned since Flipkart itself is a registered entity in Singapore and the major investors in the company may be having registrations in other locations and the Indian tax officials have to first gather these details and look at the tax implications for the government.
At the first level, the Indian investors who will liquidate their holdings to Walmart have to pay the capital gains tax and there may not be any confusion on that score. At the next level, of the foreign investors, in particular, the SoftBank group of Japan, Naspers from South Africa and Tiger Global from the US are the prominent foreign investors in Flipkart.
As of now, the IT department has only addressed a query letter to both the parties asking for the complete details from them, which Flipkart has reported to.
More importantly, with India already having tax treaties in place with some of these countries, like Singapore and Mauritius, even if some of these investors are registered there, the capital gains tax becomes payable in India.
Withholding tax is also another factor that could come into play. These are the issues being currently sorted out by the taxmen with the help of Flipkart and Walmart. There are also laws in place to identify and impose tax if some of the structuring of the investments have been purposefully done with the intention to avoid being taxed.
It appears Flipkart has sent in a detailed response while Walmart is yet to do so.
From the Indian tax departmentâ€™s point of view the Vodafone experience may still be haunting them and they wouldnâ€™t want any such mess to be created this time round.