Tiger Global’s treaty ‘abuse’ case key to how money flows to India, ETCFO
Overseas strategic investors, offshore private equity and venture capital houses, and foreign portfolio investors (FPIs) active in derivatives have their fingers crossed on the possible outcome of the much-awaited Supreme Court verdict on the American investment firm Tiger Global (TG) which faces a huge tax demand from India. The crucial judgement which was reserved for months would determine how international investors from Mauritius, Singapore and other treaty countries that serve as key gateways for foreign capital, play and structure their long bets on India stories.
DIRECT & INDIRECT TRANSFER
The high-stake feud has its origin in 2018 when TG had sold shares it owned in Flipkart Singapore (which held stocks of Flipkart India) to another foreign investor linked to Walmart. The Flipkart Singapore shares were held by TG entities in Mauritius-which, like Singapore, has a tax treaty with India. No capital gains tax was paid as it was an ‘indirect transfer’: no shares of Flipkart India was ‘directly’ transferred; instead TG Mauritius sold shares of Flipkart Singapore which controlled Flipkart India. Under the treaties, investors from treaty jurisdictions are spared capital gains tax for indirect transfer of Indian assets.However, the I-T department questioned the arrangement on the grounds that TG Mauritius was only a vehicle used to escape tax by taking advantage of the treaty. Insisting that TG Mauritius lacked ‘substance’, the tax office raised a demand of ₹14,500 crore (over $1.7 billion as per today’s exchange rate), tossing aside the tax residency certificate (TRC) that TG had received from the Mauritian authorities. This put a question mark on the adequacy of TRC foreign investors use to plan tax.
The dispute has now reached a climax. “The court’s decision could have a significant impact on the taxation of global investment funds investing here. Depending on the verdict, investment funds may have to factor in a revised tax cost in their IRR (internal rate of return) while evaluating India investments, which could influence their attractiveness,” said Bijal Ajinkya, partner at the law firm Khaitan & Co.
WHO ALL SHOULD WATCH OUT
Who could be impacted if SC rules in favour of the tax department?
i) Foreign direct investors (like PE, VC, and MNCs) making indirect sale of equity interest investment in India.
ii) Sebi-registered FPIs from treaty countries trading in equity futures and options who pay no tax derivative profits.
iii) FDI and FPI investors who profit from direct sale of shares bought before April 1, 2017. While such investors pay capital gain tax on sale of shares purchased on or after April 1, 2017, a grandfathering provision in revised treaties exempt them from tax on gains from sale of stocks bought prior to this date.
All of them may face tax if the I-T office suspects that their shops in Mauritius and Singapore are paper entities to evade tax. “The ruling could provide a much-needed clarity on the evidentiary value of a TRC-how sacrosanct it is in accessing tax treaties and whether I-T can look beyond to examine economic substance. This may encompass factors including the presence of employees, location of key decision-makers, and existence of assets. Equally important would be the court’s approach in assessing the commercial rationale for structuring investments through tax-efficient jurisdictions,” said Ashish Karundia, founder of the CA firm Ashish Karundia & Co.
The ruling, said Rajesh Gandhi, partner, Deloitte India, could reshape investor sentiment and India’s risk profile, making it imperative to establish clear guidelines on economic substance, strong anti-abuse provisions, and consistent treaty application to balance investor certainty with tax fairness. Significantly, the ruling would decide whether Mauritius-India treaty benefits apply only to direct transfers or can be extended to indirect transfers as well, he said.
The case has seen twists and turns. The quasi-judicial body Authority for Advance Ruling had ruled in revenue’s favour following which the Delhi High Court upheld TG’s stand, causing the tax authorities to move SC.
But given the complexity of cross-border tax regulations, the story may not end on Thursday. “Even if TRC-based treaty access is upheld,” said Karundia, “the department could still invoke the principal purpose test (once notified in the India-Mauritius treaty), where it can establish to a reasonable extent that obtaining a tax benefit was one of the principal objectives of an arrangement, and accordingly deny the benefits.” A PPT is an anti-abuse rule in tax treaties.
