FLIPKART DEAL. Walmart, Flipkart likely to face tax hurdles, treaty issues

The Walmart-Flipkart deal may have brought cheer to the retail e-commerce eco-system, but it could see both the entities run into tax hurdles as well as treaty issues, while the government may be forced to review its FDI policy on multi-brand retail.

Post Vodafone ruling by the Supreme Court, the government introduced norms relating to an indirect transfer of assets which may become applicable in this case too, and hence, the position in law on this subject is extremely fluid, a tax expert told BusinessLine .

Another major issue which the government will have to take a stand on is whether it will henceforth allow multinational retail chains like Target and Tesco to acquire majority stakes in other Indian e-commerce companies such as Snapdeal and Shopclues.

Double tax pact

Ashok Shah of the chartered accountancy firm, N A Shah Associates told

BusinessLine that the issue relating to the availability of Double Tax Avoidance Agreement will arise. As some of the investors in Flipkart are based in Singapore, and shares of Singapore company are intended to be sold, a question will arise whether they are entitled to treaty benefit particularly in the context that there is a provision in the treaty relating to limitation of benefits and the tax authorities were to hold that Singapore entity is a shell or a conduit company.

One more issue which may arise is whether Walmart will deduct tax at source. With regard to uncertainty in tax position, parties could approach the Authority for Advance Ruling for determination of tax liability, Shah said.

Possible implications

L Badri Naryanan, Partner, Lakshmikumaran & Sridharan Attorneys, said there could be possible tax implications for Walmart Inc under the provisions of the Income Tax Act, 1961.

Badri Narayanan said the implications for the buyer and the sellers primarily are the applicability of tax on this transaction under the Income Tax law and the rates at which such tax liability is to be discharged.

If the transaction attracts indirect transfer provisions as provided under the Income Tax Act, 1961, Walmart Inc., will be required to with-hold taxes.

Subsequently, the rates at which the taxes are to be withheld, will be required to be ascertained keeping in view the rates in force under the domestic law and the relevant tax treaties of India with the jurisdictions of the sellers.

The $16-billion deal could also force the government to either bring in a new law or relax existing norms related to multi-brand retail business.

According to one of the leading tax experts, neither Amazon nor Flipkart strictly follows the marketplace model and hence there is an ambiguity as far as this model is concerned.