Supreme Court Ruling Strengthens Government’s Position in Tax Cases
India’s Supreme Court ruling on 15 January has added significant uncertainty for foreign investors, particularly private equity firms, following a judgment that strengthens the government’s hand in tax disputes. The court ruled that US investment firm Tiger Global must pay tax in India on its 2018 sale of its stake in e-commerce giant Flipkart to Walmart. The judgment overturned a 2024 Delhi high court decision that had allowed Tiger Global to claim tax relief under the India–Mauritius tax treaty.
A Tougher Interpretation of Tax Treaties
The ruling is significant as it sets a tougher interpretation of tax treaties, enabling tax authorities to deny treaty benefits if offshore investment structures are deemed to be sham entities with little commercial substance. The judgment now gives Indian authorities broad powers to scrutinize offshore corporate deals, which experts say could unsettle international investors and hurt business sentiment. Ketan Dalal, managing director of Katalyst Advisors, expressed concerns, saying that the ruling could open the door for scrutiny of past transactions previously thought to be settled.
Tiger Global’s Dispute and the Role of Mauritius
The dispute traces back to 2018, when Tiger Global sold its 17% stake in Flipkart to Walmart for about $1.6 billion. The investment was made through three Mauritius-based entities, with Tiger Global seeking tax relief based on a long-standing tax treaty between India and Mauritius. Under the treaty, the firm argued that the gains from the sale were not taxable in India. However, Indian tax authorities rejected the claim, alleging that the Mauritius firms were mere conduits set up solely to avoid taxes.
Supreme Court’s Ruling on Offshore Investment Structures
In siding with Indian authorities, the Supreme Court ruled that tax certificates alone are insufficient proof for claiming treaty benefits. The court stated that foreign investors cannot rely on offshore structures that lack real commercial activities. The judgment emphasizes India’s inherent right to tax income arising within its own borders. The case has implications for future foreign direct investment and private equity exits, as it could expose many past deals to potential scrutiny.
Broader Implications for Foreign Investment in India
The ruling has wider implications, particularly as India and Mauritius amended their tax treaty in 2024 to restrict tax benefits only to companies with legitimate businesses. Although the amendment has yet to come into effect, it signals a shift towards greater scrutiny of offshore investments. Experts highlight that the ruling could impact future cross-border transactions, especially as India seeks to balance attracting foreign capital with ensuring tax compliance.
Concerns Over Policy Stability and Uncertainty
While tax experts agree that the court applied the law as written, they warn that the ruling could undermine policy stability, a critical factor for foreign investment. The judgment challenges previous assurances that investments made before 2017 would be exempt from taxes. As a result, private equity firms may now face the risk of having to re-evaluate their investments, leading to an increase in due diligence and documentation requirements.
Long-Term Impact on Foreign Investment and Business Sentiment
A lawyer advising some private equity firms noted that the ruling has caused considerable concern, particularly for pre-2017 investments previously assumed to be tax-free. Amit Maheshwari, a tax partner at AKM Global, stated that this reversal of settled positions has created deep uncertainty, as firms now have to reconsider their strategies. This uncertainty may slow the inflow of foreign capital into India, especially as global trade tensions and geopolitical risks already weaken fund flows.
Featured image credits: RootConf 2014 via Wikimedia Commons
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