Under Section 197, the seller of shares can obtain withholding tax certificate from the tax department 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.
"Walmart still has time till September 7 to deduct and pay withholding tax on payments made to about 44 different shareholders of Flipkart," the official said, adding the department can only proceed in this case once the deadline for payment of taxes is over.
Once the withholding tax is paid, the tax authorities will scrutinise whether Walmart has deposited the taxes correctly as per the assessment made by the tax department on the basis of the share purchase agreement shared with it by Bengaluru-based Flipkart.
However, if the Walmart fails to deposit the correct amount of taxes, then the department will write to Walmart asking for details of taxes deducted and the reasons for failing to deposit the required amount.
Nangia Advisors LLP Managing Partner Rakesh Nangia said: "If Walmart is liable to withhold tax, non-withholding of appropriate taxes would entail implications under Section 201 of the I-T Act, i e Walmart shall be construed as an 'assessee in default' liable to pay interest and penalty for failure to withhold and deposit to the credit of the government the appropriate taxes".
"The question arises what could be the possible reason behind Walmart's strategy of not approaching Income-tax authorities to obtain lower/nil withholding order under Section 197? Though order under Section 197 acts as a provisional assessment of the transaction between Walmart and shareholders of Flipkart, it is not an appealable order."
Walmart had in July assured the I-T department that it will fulfil all tax obligations. Flipkart had in May shared share purchase agreement with tax authorities, based on which the I-T department has assessed the tax rate that would be applicable for investors in Flipkart who are selling the shares to Walmart.
Significant shareholders in Flipkart, like SoftBank, Naspers, venture fund Accel Partners and eBay, have agreed to sell their shares. Also, co-founder Sachin Bansal has decided to sell his stake to the US retail major.
The department has been reviewing Section 9 (1) of the I-T Act, which deals with indirect transfer provisions, to see if the benefits under the bilateral tax treaties with countries like Singapore and Mauritius, could be available for foreign investors selling stakes to Walmart. Singapore-registered Flipkart Pvt Ltd holds majority stake in Flipkart India.