In 2009, the private equity firm had invested in the Singapore-based holding company of e-commerce major Flipkart, and then increased its exposure over the next two years to about $1 billion—a 20% stake.
In 2017, it sold part of its holding to SoftBank Group, and in 2018, it sold most of its shares to Walmart. This sale triggered the tax dispute.
The holding structure was complex. It was Tiger Global Mauritius (TGM) that held equity in Flipkart Singapore, which in turn had a stake in Flipkart India, and what was sold to Walmart in 2018 was TGM’s stake in Flipkart Singapore.
As such, this was not a sale of a company in India. This offers a parallel with the Vodafone case: in 2007, Hong Kong-based Hutchison Group had sold its stake in overseas holding firms (including one in Mauritius) that controlled Hutchison Essar in India to UK-based Vodafone. In TGM’s case, though, the sale was by a Mauritius company of shares in a Singapore firm.
Since 1992, Article 13 of an India-Mauritius tax treaty had offered a capital gains exemption till it was amended with effect from 1 April 2017.
Consider the historical background. In 1991, India had to reform its economic policies after running short of foreign exchange and New Delhi liberalized rules for foreign investment inflows. Around the same time, Mauritius passed the Mauritius Offshore Business Activities Act, which brought into effect the tax treaty with India that gave tax exemption on the sale of shares by companies resident there.
It was obviously designed to attract foreign investment to India via Mauritius. However, a Tax Residency Certificate (TRC) regime arose that allowed treaty benefits to be claimed by obtaining a TRC in Mauritius.
As Circular No. 682 of the Central Board of Direct Taxes (CBDC) dated 30 March 1994 states: “Any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.”
In August 2016, Sections 3A) and 3B) were inserted in Article 13 of the treaty: “3A) Gains from the alienation of shares acquired on or after April 1, 2017 in a company which is resident of a Contracting State may be taxed in that Stage; 3B) However, the tax rate on the gains referred to in Paragraph 3A of this Article and arising during the period beginning on April 1, 2017 and ending on March 31, 2019 shall not exceed 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated.”
It would be obvious that shares acquired up to 31 March 2017 should get the benefit of the earlier exemption. In April 2000, the CBDT issued Circular No. 789, clarifying that a TRC issued by Mauritius is sufficient evidence for taxpayer residence status. On its basis, in the Azadi Bachao Andolan case, on 7 October 2003 the Supreme Court held that if a valid TRC is provided, the treaty benefit cannot be denied. That judgement also stated that the 2000 circular was within the CBDC’s powers to issue.
The Mauritius route clearly had the government’s approval and the TRC had “deemed” substance because the purpose of the treaty was to lure foreign investment. But unfortunately, endless doublespeak over three decades has acted as a dampener for investors.
One would assume the Supreme Court was acquainted with that context. Yet, it ruled against Tiger Global and its use of tax grandfathering—notably, the transactions under scrutiny involved shares acquired before before 1 April 2017. The tax department had still pressed for a capital-gains levy and the top court focused on substance over form and the fact that underlying business was in India to uphold the tax claim. Here are some larger issues:
First, the government’s keenness to attract foreign investment was clear in its use of the Mauritius treaty and CBDT circulars to convey its intent to honour the tax exemption. Yet, strangely, the government chose to press for the levy.
Second, what are the signals this sends to foreign investors? Especially in today’s context, as we face geopolitical headwinds and uneven capital inflows.
All of this raises a question. Should the Supreme Court not have considered the larger picture, including the CBDT circulars and intent to allow the grandfathering of shares acquired pre-April 2017? This judgement against Tiger Global’s exemption claim has cast a long and dark shadow on the certainty of law, sanctity of tax treaties and the credibility of government promises (even if only implied).
Overall, it has sent negative signals to foreign investors, particularly private equity players. While there may be few other cases of its kind, the ruling raises the risk of deals long-concluded being reopened. It also casts into uncertainty cases covered by other treaties with a similar provision, such as one with Singapore, as well as cases under the India-Dutch treaty, which has its own form of exemption.
One can only hope that some kind of resolution will emerge and positive signals will be sent by the Centre to mitigate the impact of this judgement.
Sneha Mahnot contributed to the article.
The author is founder of Katalyst Advisors Pvt Ltd.
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