Foreign investors and private equity firms operating in India are making anxious calls to advisers and lawyers following a significant Supreme Court ruling earlier this month that has bolstered the government's position in tax disputes.
On January 15, India's Supreme Court ruled that US-based investment firm Tiger Global must pay tax in India on the sale of its stake in e-commerce giant Flipkart to Walmart in 2018. This 152-page judgment reversed a 2024 Delhi High Court decision that had previously allowed Tiger Global to claim tax exemption under a long-established India–Mauritius tax treaty.
The ruling signals a stricter interpretation of tax treaties and permits Indian authorities to deny treaty benefits if investments via offshore structures are viewed as sham entities lacking commercial substance, regardless of valid documentation.
Experts caution that the ruling could shake the confidence of international investors, noting that it may lead to increased scrutiny of past transactions that were long considered settled. Ketan Dalal of Katalyst Advisors warns, The judgment opens up unjustifiable windows for tax authorities to scrutinize any offshore corporate deal, indicating potential instability in investment policies.
The Tiger Global case dates back to 2018, when Walmart's acquisition of Flipkart marked a landmark transaction in India’s e-commerce sector. Tiger Global sold its entire 17% stake for approximately $1.6 billion through three Mauritius-based entities, contending that their gains were exempt from Indian tax based on this decade-long tax treaty.
However, Indian tax authorities argued that the Mauritian entities functioned merely as conduits for tax avoidance without genuine business purposes. The Supreme Court ultimately sided with Indian officials, instructing that tax certificates do not inherently guarantee treaty benefits and that the investment frameworks lacked real commercial substance.
Judge JB Pardiwala noted, Taxing an income arising out of its own country is an inherent sovereign right... emphasizing the state's authority over its tax framework.
The aftermath of this ruling indicates that uncertainties loom large over future foreign investments, particularly those routed through tax-friendly locations such as Mauritius and Singapore. As India seeks to raise tax revenues and clamp down on perceived tax evasion, global investors may find themselves reassessing the risks associated with their investments in the region.
This legal shift could further slow foreign capital inflows, creating a challenging environment for international investors already grappling with geopolitical complexities and economic uncertainties.
