Tiger Global tax ruling risks shaking foreign investor confidence

The recent Supreme Court judgment in the matter involving the Indian tax authorities and Tiger Global and others (assessees) is being seen as a landmark in India’s tax jurisprudence. It is likely to have a significant bearing on existing foreign investments in India and future inflows. The matter is related to Tiger Global’s Mauritius-based entities selling shares in Flipkart, which was incorporated in Singapore and had business and assets in India. The shares were sold at the time when Walmart Inc, incorporated in the United States, bought a majority stake in Flipkart. The assessees approached the Indian tax authorities, seeking an exemption from tax on gains. However, the tax authorities noted that the assessees were not eligible for exemption under the India-Mauritius Double Taxation Avoidance Agreement (DTAA).  After years of legal contestation, the Supreme Court last week upheld the position of the tax authorities. 

The India-Mauritius DTAA has been under scrutiny since it was signed in 1982. It was always seen as a route to avoid tax. The DTAA and the related provisions were amended over time to reduce tax avoidance, but the latest judgment might completely shut this route. When the assessees in this matter approached the Authority for Advance Rulings (AAR), it concluded that the transaction was designed to avoid tax.  The AAR found that management control of the companies concerned was not with the board of directors in Mauritius. It further ruled that an exemption under the DTAA was granted to residents of Mauritius for gains arising from the sale of shares in Indian companies. In this case, gains arose from the sale of a Singapore entity. Therefore, it did not qualify for exemption. The Delhi High Court, however, rejected the AAR conclusions, but its verdict, in turn, was overturned by the Supreme Court last week. 

Several issues have arisen after the Supreme Court judgment. There is no dispute on India protecting its tax sovereignty. However, it is worth asking whether different interpretations of existing laws and conventions or retrospective reading of the laws, should be allowed to disturb the investment environment. In principle, based on existing laws and conventions, an entity invests in a particular jurisdiction. Thus, is it fair or in the country’s interests to reprimand existing investors with a different interpretation of the facts? To be fair, large global entities do structure their transactions in a way to reduce tax liabilities. However, if a country is not comfortable with such arrangements, it must close loopholes prospectively. 

A retrospective reading of the law seriously affects the business environment. In the present case, for instance, the validity of the tax residency certificate has been questioned, which means revisiting a longstanding convention. Further, grandfathering provisions were also rejected by the Supreme Court on the grounds that while the shares were acquired in the prior period, the sale happened after the general anti-avoidance rules and provisions came into force. This again is debatable. It is also worth highlighting that in his concurring judgment, one of the judges penned an advisory on tax sovereignty and how India should enter into tax treaties with other countries. It must be noted in this regard that the executive, under the powers provided by the law, is best positioned to decide on the kind of agreement to have with any country at any given point in time. It is also best placed to determine the right balance between attracting investments and maximising tax revenue. However, agreements must be adhered to in both letter and spirit, and not be sacrificed for maximising short-term revenue.