Tax thorns haunt Walmart-Flipkart deal, foreign shareholders want clarity

AAR is a legally constituted body whose ruling is binding on the applicant as well as government authorities.

Tax-related issues are cropping up in the Walmart-Flipkart deal even almost two years after the transaction was done.

A clutch of foreign firms who were shareholders in Sachin Bansal and Binny Bansal-founded Flipkart have moved the Authority of Advance Rulings (AAR) to seek clarity on the taxability of the capital gains arising out of the $16-billion deal struck in May 2018.

American retail major Walmart reportedly deducted taxes from Flipkart's foreign shareholders including SoftBank, Naspers and Accel Partners to pay withholding tax to the government for capital gains made by these entities. A withholding tax, or a retention tax, is an income tax to be paid to the government by the payer of the income rather than by the recipient. The tax is thus withheld or deducted from the income due to the recipient.

AAR is a legally constituted body whose ruling is binding on the applicant as well as government authorities. Under the Income-tax Act, a foreign company or the Indian taxpayer can approach AAR and obtain a ruling on the taxability of the proposed transaction in India. "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 aware of the development.

A SoftBank spokesperson declined to comment, while email questionnaires sent to Accel and Walmart on Tuesday did not elicit any response.

Although some of the foreign investors of Flipkart had sought a lower deduction certificate under Section 197 of the I-T Act from the tax department, a few cases got rejected and others are under consideration.

The I-T provision provides for a buyer to seek a 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.

"This mechanism for obtaining lower deduction certificate enables non-residents to ensure that tax is deducted not on the sale price but on their taxable capital gains arising from such sale. In that case, an applicant can seek a certificate which could result in lower quantum of tax being withheld," explained a tax official privy to the development.

When Walmart got a $10 billion Phone Pe surprise after buying Flipkart

PhonePe has grown into one of India's leading digital payments companies.

Business Standard : When Walmart Inc paid $16 billion for control of India’s e-commerce pioneer Flipkart Online Services Pvt last year, the American retail giant got a little-noticed digital payments subsidiary as part of the deal. Now the business is emerging as one of the country’s top startups, a surprise benefit for Walmart from its largest-ever acquisition.

Flipkart’s board recently authorized the PhonePe Pvt Ltd. unit to become a new entity and explore raising $1 billion from outside investors at a valuation of as much as $10 billion, according to people familiar with the matter, asking not to be named because the discussions are private. The funding may close in the next couple of months, although the talks are not finalised and terms could still change, they said. The unit would then become independent with a distinct investor base, although Walmart-owned Flipkart would remain a shareholder. Walmart and Flipkart didn’t respond to emails seeking comment.

PhonePe -- which means “on the phone” in Hindi and is pronounced “phone pay” -- has grown into one of India’s leading digital payments companies. Its volume and value of transactions have roughly quadrupled over the past year as the country’s consumers adopt the technology to transfer money digitally to businesses and each other. PhonePe is gaining ground on Paytm, which leads the field and is backed by Warren Buffett.

PhonePe is an “underappreciated asset,” Edward Yruma, an analyst from KeyBanc Capital Markets, wrote in a recent research note. He estimated the business may be worth $14 billion to $15 billion, separate from Flipkart’s e-commerce operation.

The startup was founded in December 2015 by three friends who left Flipkart to get it off the ground. Within a year, Flipkart founders Binny Bansal and Sachin Bansal decided to acquire PhonePe, realizing that solving payments friction would make it easier for consumers to buy online. Less than a year later, the Indian government made the unprecedented move to ban large banknotes to curb corruption and boost digital transactions. With this “demonetization,” Paytm, PhonePe and other fledgling services flourished.

Cheap smartphones and cut-rate wireless data plans have brought millions of Indians online in the years since, boosting the whole industry. In June, the PhonePe app reached 290 million transactions with an aggregate value of $85 billion, compared with 71 million transactions at $22 billion a year earlier, according to the company.