Flipkart co-founders and other shareholders get tax notice on Walmart deal

Flipkart co-founders and other shareholders get tax notice on Walmart deal
Photo Credit: Photo Credit: Thinkstock
22 Nov, 2018

The income tax department has served notices to 35 Flipkart shareholders including its co-founders Sachin Bansal and Binny Bansal enquiring about their capital gains from the Walmart-Flipkart deal that took place in May this year, separate media reports had said.

Tax sleuths have asked the people, all of whom held stakes in the e-commerce behemoth, to disclose the total income they received from the share transfer, The Economic Times reported.

The co-founders held 5% stake each and are said to have made between $700 million to $1 billion from the sale which was approved by the Competition Commission of India in August.

The I-T department has asked the Bansals to explain the total income they received from the deal, the capital gain tax liability and how they intend make the tax payments, another report by The Times of India stated, citing unnamed people in the know. The Bansals are yet to respond to the notice sent on 18 October while the other Indian shareholders have begun addressing the queries, the report added.

Previously, the IT department had served a notice to Walmart enquiring about the capital gains for each of the 46 stakeholders in Flipkart. In repose to the notice, the US retail giant had deposited Rs 7,439 crore with the I-T department for withholding tax payments made to Flipkart’s non-resident shareholders, the reports said. However, they added that the I-T department issued another notice to Walmart seeking clarity on the break-up of tax deductions on payment made to each shareholder.

In May this year, Walmart bought a 77% stake in India’s largest e-commerce company for $16 billion. The acquisition was completed in August this year and valued Flipkart at $20.8 billion. Several Flipkart shareholders including Sachin Bansal, venture capital firm Accel Partners, Japanese investment giant SoftBank and South African tech conglomerate Naspers had sold either all or part of their stakes to Walmart as part of the acquisition.

Binny Bansal, who abruptly resigned as group chief executive officer last week following an investigation into personal misconduct on his part, now holds a 4.2% stake in the company.

An email query sent to Walmart regarding the income tax notice didn't elicit a response at the time of publishing this report

Technically, while investors in Flipkart owned a stake in its Singapore parent – Flipkart Pte Ltd – more than 50% of the value of the Singapore entity is derived from its Indian business. Since a large share of the e-commerce firm’s revenues largely comes from India, its income is taxable in the country.

Under the Double Taxation Avoidance Agreement (DTAA) that India has signed with some countries, a short-term capital gains tax of a maximum of 40% could be applicable to SoftBank and 20% for other investors.  The India-US and India-South Africa DTAAs confer no exemption from capital gains tax. Under the India-Mauritius DTAA, investments made before 1 April 2017 will be taxable only in Mauritius. It is interesting to note that Mauritius has no capital gains tax. This means only Mauritius-based investors seem to have treaty benefits at the moment (for investments made before April 2017). Read more about how SoftBank, Flipkart ESOP holders and others will be taxed in the Walmart deal here.