Understanding the Tiger Global faceoff with revenue dept over taxability

Tiger Global is likely to go to court over the revenue department as the Authority of Advance Ruling (AAR) refused to grant relief over tax liability on its Rs 14,500 crore exit. According to an ET report, the hedge fund is likely to argue that the investment arms were not liable to pay tax in India. 

So, why is this matter going into the court, and what is it all about? Let’s understand this. Tiger Global owned around 22% stake in Flipkart’s parent entity through its Mauritius based SPV, out of which they sold approximately 17% to Walmart’s Luxembourg based entity FIT Holdings SARL in a deal that was valued to be around Rs 14,500 crore in 2018. 

Importantly, both of these entities were set up strategically to avoid heavy taxation on capital gains in India and Europe. At this point, let’s understand the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius and how Tiger Global is trying to utilise it.

As per the treaty, if a resident of Mauritius sells shares in an Indian company, she or he shall be taxed in Mauritius instead of being taxed as per Indian Income Tax Act. Companies registered in Mauritius have been benefiting from this rule ever since as there is no tax on capital gains in the island country.

Due to this, Mauritius became the most popular route to direct any investment in India in the last two decades. As much as $ 134.47 Billion, which made up 32.01% of all the FDI was sourced through Mauritius between April 2000 and March 2019.  

The treaty was amended in 2016 and all the shares acquired on or after 1 April 2017 in an Indian resident company became taxable on sale as per the Indian tax system.

Tiger Global was trying to utilise the DTAA treaty to avoid taxability in India. However, AAR rejected the US-based hedge fund’s application for exemption under the above-stated treaty. AAR reasoned that Tiger Global set up an SPV in Mauritius only to avoid paying taxes in India; hence they should not be awarded the tax exemption. Tiger Global has argued that these shares were acquired before the amendment and therefore qualify for the exemption.

The case for substance over form has come back to haunt India centric structures once again - the ruling questions the relevance of offshore structures on FDI investments into India since most investments through Mauritius/Singapore will have GPs sitting elsewhere,” said Divakar Vijayasarathy founder of tax consulting firm DVS Advisors LLP. VC investments through trusts and funds might now have to directly flow from the home jurisdiction (master fund) to India. Further, all present investments through such structures would now have a taxman's sword hanging till exit. This is definitely a dampener unless the government comes up with its own stand in this regard

The capital gains on the profit from the exit of Tiger Global is seen as a discouragement for many investors who made the investments in Indian companies through Mauritius. We often see venture capitals investing through the island country.   

Quoting experts, a Mint report highlighted that U-turn from treaty protecting investments from Mauritius before 2017 is slated to impact future exits who have investment capital via tax havens. The faceoff between ARR and Tiger Global could hurt investor sentiment for local startups who have been witnessing low interest from investors due to Covid-19 pandemic.