In a legal precedent, the Supreme Court of India has ruled that Tiger Global, the US-based investment company, will pay capital gains tax on the 2018 sale of the shares of Flipkart to Walmart. This ruling represents a huge victory to the Indian tax officials and a clear indication on the implementation of tax laws on cross border investments.
Background: Flipkart-Walmart Deal of 2018
In 2018, Walmart acquired a majority stake in a deal with Flipkart to the tune of about 16 billion. In this transaction, Tiger global sold its shares to the tune of 1.6 billion dollars. Nonetheless, there was a protracted legal battle on whether Tiger Global was liable to pay capital gains tax in India because it was using Mauritius-based holding companies.
The Core Issue: Tax Avoidance or Legitimate Structuring?
Tiger Global maintained that its Mauritius-based firms that owned the Flipkart shares were bona fide residents that enjoyed the safeguarding of the India-Mauritius Double Tax Avoidance Agreement (DTAA). They argued that they were not supposed to pay taxes to the Indians on their capital gains earned by selling the assets as the Indians did not tax them due to the authenticity of Tax Residency Certificates (TRCs).
Conversely, Indian tax officials argued that the Mauritius structure used by Tiger global mainly aimed at evading the tax laws in India. They said that although officially Mauritius entities had been used, the actual control and benefits were with the US parent company of Tiger Global, thus, the arrangement constituted impermissible tax avoidance.
The Decision of The Supreme Court: Indian-Supported in Taxation
Tiger Global Case
The Supreme Court ruled in favor of the tax officials and said that the arrangement was a tax avoidance scheme in essence. The court underlined that a Tax Residency Certificate is not sufficient to provide immunity to the establishment of the structure in the case when the entire structure negates the intention of the treaty.
Through the ruling of J.B. Pardiwala and R. Mahadevan, it was quite evident that India has retained the sovereign right to tax income earned in its territory and nothing can be used to protect this income by relying on the treaty provisions.
Effects of the Decision: More Intense Review of Offshore Dealings
According to the legal experts, this sentence is going to have a wide impact on the foreign investors:
- Enhanced review of the Tax treaties: Mauritius and Singapore Investment structure and other countries with treaties will strictly be examined to avoid tax evasion.
- Requirement of Real Business Substance: Money and investors are required to make sure that their offshore business has real business substance and records in order to benefit in treaties.
- New Deal Structuring: Future acquisitions, sales, and mergers particularly in the tech and e-commerce industry will need restructured deals to comply with the Indian tax regulations.
What Lies Ahead?
Tiger Global has not replied to the ruling of the Supreme Court. Although the company might want to appeal, the decision is a strong indication to every foreign investor that India is keen on sealing the gaps through which tax evasion is committed.
To the tax authorities in India, this is a major win and a sign of their intentions to tax high-value overseas transactions in a fair manner.
Conclusion
Such a decision of the Supreme Court is not only clarifying the scope of tax treaties but also strengthens the position of India as a jurisdiction that will apply its laws with regard to taxes decisively. This is one of the warnings that should be taken into consideration by foreign investors to ensure that they plan their investment in India in a tougher regulatory environment.