Supreme Court ruling on Tiger Global puts Mauritius investment route under tax scanner
The Supreme Court's ruling against Tiger Global has tightened scrutiny on Mauritius-based investment structures used by foreign funds to invest in India. The court held that treaty benefits depend on real commercial substance, not just legal incorporation, raising tax risks for paper entities.
New Delhi: The decision by the Supreme Court to prohibit Tiger Global may change the flow of foreign funds in India. The court has indicated its intentions to pay greater attention to offshore arrangement by maintaining a Rs 14,500 crore tax demand, a resemblance that portrays that offshore structure will need to be examined under a more thorough overview in case they fail to depict economic presence.
The decision would ripple all the way across more than just one investor. The venture capital and the private equity funds which were channeling their investments through Mauritius over the years may now find themselves in the need of reviewing the structure. The tax benefits in treaties will cease to be automatic. The government will scrutinize very closely where the decision is being made and where the control is residing.
Substance takes centre stage
According to the participants of the market, the ruling turns the making of the substance into the key test. Money that is represented in Mauritius entities will have to demonstrate actual business in Mauritius. It also involves local administration, power of decision and clear business agenda. The shell entities or paper structures might become deficient of treaty protection as well as subject to Indian taxes.
Over the years, Mauritius had been the most desirable entry point to foreign investors thanks to favourable capital gains treatment and convenience in holding dollar accounts. Nevertheless, money could be a source of conflict as to whether the lines of operation were substantial or not. The ruling creates an issue that old exits might now be re-opened in case substance was found missing.
Impact of treaty changes after 2017
The executives of the industry indicate that the tax treaty between India and Mauritius was updated in 2017. This, they tell us, was clear cut: Indian deal gains should be taxed in India. Even on exits made earlier, some funds had already paid Indian taxes on post 2017 exits.
Tax advisers warn that investors based in low-tax jurisdictions should now have a clear-cut explanation as to why they are based in those jurisdictions. Adequately commercial ground was not established, deals could be reopened and taxed locally.
Ripple effects beyond Mauritius
Lawyers think that the decision can have an impact on interpretation by other tax treaties. It may also impact on foreign portfolio investors and complex trades of derivatives. Another layer of uncertainty is the perception of the court that treaties cannot be applicable in the case of indirect transfer of shares.
This is especially applicable to the sale of Flipkart, in which case offshore parent entities are used. These instances have indicated to the court that routing transactions outside India might not protect investors against Indian taxation claims.
According to tax experts, the judgment provides a test case. In order to receive the benefits of a treaty, an entity should demonstratively be a true resident of independent commercial substance. In case it is only a conduit, it does not qualify as a treaty protection.
To foreign investors, there is no grey message. Constructions that are constructed with the sole purpose of tax efficiency are dangerous. In the future the bargaining through Mauritius will not be so easy as before.