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By Siri Bulusu
Walmart has responded to questions from India’s tax department about the details of its Flipkart acquisition, and is “actively responding” to the country’s competition authority.
A spokesperson for Walmart Inc. confirmed the information in a June 5 email to Bloomberg Tax. The company’s responses to multiple government inquiries signals its commitment to operating in India. Walmart announced May 9 it would acquire a 77 percent stake in Flipkart Group, a landmark deal for the retailer, which has never operated in India before.
The Walmart spokesperson said the company expects the deal to be wrapped up before the end of the year. But practitioners say an end-of-year deadline may be ambitious given the level of scrutiny surrounding it.
“The sheer size of the deal and the media attention it has gotten has caused the government to show keen interest in following up, and the tax department would go through the details with a very fine tooth comb,” Riaz Thingna, director at Grant Thornton India, told Bloomberg Tax June 5.
Government agencies typically don’t announce investigations into companies. India’s Ministry of Commerce and Industry and Department of Revenue declined to confirm if any investigation into the merger has been initiated.
Flipkart India didn’t return a request for comment.
“Any investigation into the deal will be seeking to understand the level of complexities involved by all parties — when such a large deal is undertaken its going to attract government attention” Anish Narang, managing director at Karavan Advisory Enterprises LLP, told Bloomberg Tax June 5.
Practitioners say the tax department will seek clarity on the structure of the merger because while Walmart will be purchasing shares that derive value from India, Flipkart’s shareholders are based in many different jurisdictions subject to any different tax laws.
“If the scenario reaches a conclusion where there is a question of the tax payment to India, then the tax department will proceed with their machinery to seek that information from the Reserve Bank of India, the Commerce Ministry—they’ll do whatever they can,” Kuntal Dave, managing partner at Nanubhai Desai & Co., told Bloomberg Tax June 5.
Even through the shareholders are earning capital gains from the transaction, Walmart is the entity under the tax spotlight due to a withholding tax rule in India’s tax code.
Walmart is liable to withhold taxes before it makes any payment to Flipkart shareholders based across Japan, Singapore, Mauritius, and India, practitioners said. The withholding tax is levied on capital gains made through the indirect transfer of shares that derive value from Indian assets.
Small businesses requested the Commerce Ministry’s inquiry investigate how the merger will impact India’s supply chain and small traders, practitioners said.
India’s foreign direct Investment rules previously barred foreign multi-brand retailers like Walmart from owning more than a 49 percent stake in an Indian operation. But small business lobbies are contending that Walmart bent those FDI rules by entering India via the e-commerce market with allows foreign companies to invest up to 100 percent.
In a June 4 statement signed by hundreds of small-business organizations and individuals, lobby group Focus on the Global South stated that the Walmart-Flipkart merger would create a “digital stranglehold by foreign companies over India’s consumer goods value chains.”
Government investigations most likely won’t prevent the deal from going through in the end, Narang said. But, Narang added that Walmart has come under scrutiny before for its global business practices. Walmart has previously been accused of bribery in Mexico, China, India, and Brazil.
“Walmart has not done so well in some of its markets outside the U.S., so they need to look at India differently and adapt their business models so as not to squeeze out smaller traders,” Narang said. Walmart announced June 4 it would sell the majority of its stake in Brazil following years of lackluster performance there.
When it comes to a smooth transition into the Indian market, Narang said Walmart has a clear path to completion of the merger: “Go by the laws and follow the rules—plain and simple.”
--With assistance from N. C. Bipindra (Bloomberg)
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