The Supreme Court's verdict, which directed Tiger Global to pay taxes on the gains it made by selling shares in Flipkart, could potentially lead to several other investors recalibrating past gains and preparing for a likely tax outgo, as per industry experts.
For several years in the past, investors routed money through their Mauritius-based entities and made investments into Indian firms so they could avoid paying any taxes on the gains they made.
Mauritius, famous for being a tax haven, had an agreement with India until 2019 which allowed certain relaxations on taxable profits. Several funds took advantage of that status, set up offices, and wired money through Mauritius into India despite them actually being headquartered in the US or other nations.
However, a tax residency certificate (TRC) in Mauritius did not grant these exemptions to investors. The Indian regulators asked these investors to also establish substance – meaning show proof that their operations are indeed based out of Mauritius, the investment was made from there and and the office in Mauritius is not a mere outpost. The SC ruled Tiger Global failed to establish this substance and hence is liable to pay taxes on the gains.
Any other similar case, from the past, may be re-opened now and if the authorities do not have enough confidence about a substance being established in Mauritius, they may send tax notices.
“With this verdict on the largest tax exit, the floodgates to reexamine past exits and even exits from IPOs has been opened. The Tax Department will closely scrutinise exits to Mauritius based entities. While many fund managers have pivoted to Singapore, SEBI AIFs or GIFT IFSC, the past presence in Mauritius will need investors and advisors to reexamine their tax risk and make provisions,” said Siddarth Pai, founding partner, 3one4 Capital.
"Any investment made pre March 31, 2019 and where the investors have taken advantage of the DTAA will be affected," he added.
The Double Taxation Avoidance Agreement (DTAA) between India and Mauritius has been amended but there are several funds which still have an outpost in the country and invest into Indian companies.
“For years, the gateway to Indian equities has been Mauritius, not Mumbai…this often reminds one of the song Hotel California – it’s easy to check out, but impossible to leave,” Pai from 3one4 Capital added.
Ajay Rotti, Founder & CEO, Tax Compaas, underscored future FDI and FII flow will not be impacted. “The Indian Revenue’s position, however, has always been that form alone is not enough and that real substance must exist in Mauritius. There must be some activity in Mauritius for you to become eligible to get that zero rate,” he posted on social media.
“...the days of aggressive tax planning by just picking a jurisdiction on the map without ever doing anything more are clearly a thing of the past,” he concluded.
While experts warned of no ramifications in the future, some early-stage investors in India believe this ruling has complicated the investment landscape, especially for new-age tech startups.
“They (Tiger Global) went on to deploy billions and single handedly birthed our startup ecosystem. Now years after their biggest exit (selling Flipkart shares to Walmart and others) the govt and courts are clawing back their entire profits plus some more…any rational foreign investor would look at this situation and conclude I want nothing to do with this country,” Kushal Bhagia, founder, All In Capital, an early-stage venture capital firm in India, posted on social media.
While the impact may or may not be that severe and the intensity remains to be seen, Amit Ranjan, an angel investor based in India and former architect of the DigiLocker project under Digital India Programme, said “This Tiger Global tax verdict singlehandedly takes India back a few notches on the Ease of Doing Business (EODB) scale.”
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