Foreign VCs, PEs Under I-T Dept Scanner after SC's Tax Verdict on Tiger Global

In the wake of the Supreme Court's (SC) recent ruling denying tax benefits to Tiger Global, the Income Tax (I-T) Department has issued notices to around seven foreign venture capital (VC) and private equity (PE) firms, according to The Economic Times.

Tax officials from Mumbai and Bengaluru are seeking detailed information about these firms' operations in Mauritius and Singapore, the two popular destinations used by foreign investors to route investments into India. The scrutiny comes as several tax assessments for the financial year 2023–24 (FY24) are set to become time-barred by March 31, 2026.

The firms under scrutiny are those that sold investments, directly or indirectly, and did not pay capital gains tax, claiming benefits under India's tax treaties with Mauritius and Singapore.

Officials have reportedly asked the funds to provide details such as sources of funds, bank account signatories, directors' roles, ultimate beneficial owners, expenses, and whether shares were sold to related parties. According to the report, gathering more information about the Mauritius and Singapore entities would strengthen the I-T department's position while finalising assessment orders.

This follows our earlier report, where we had mentioned that tax experts have warned that the SC ruling could trigger wider investigations.

Ankit Jain, Partner in Ved Jain and Associates had pointed out that investors who claimed capital gain tax exemption recently for their exits from pre-2017 investments can now expect potential difficulties going ahead. "All pre-2017 exits that claimed treaty benefits are now at high risk of scrutiny," Jain said.

What Is The Tiger Global Case?

The I-T Department's action follows the SC's January 15 ruling in the Tiger Global case, which many experts at that time believed could have wider implications.

The case relates to Tiger Global's 2018 sale of its stake in Flipkart to Walmart. The US-based private equity investor had routed its investment through Mauritius, taking advantage of India's Double Taxation Avoidance Agreement (DTAA), which historically allowed foreign investors to avoid paying capital gains tax in India.

Although India amended its treaty with Mauritius in 2016, making capital gains taxable for investments made after April 1, 2017, earlier investments were "grandfathered", meaning they were protected from the new rules.

Tiger Global argued that since its investment was made before April 1, 2017, it should be exempt from tax under these grandfathering provisions. It also cited government statements and budget speeches clarifying that GAAR (General Anti-Avoidance Rule) would apply only prospectively.

While the Delhi High Court had ruled in favour of Tiger Global in 2024, the Supreme Court overturned that decision. The apex court held that the transaction could still be examined under GAAR, effectively denying the fund immunity from scrutiny.

This was achieved by reinterpreting the meaning of the words ‘without prejudice to’ contained in a key clause within the Indo-Mauritius treaty.

The court nullified the clause that grants immunity from GAAR to pre-2017 investments by interpreting the meaning of the phrase “without prejudice to the provisions of” contained in the subsequent clause.