India’s Income Tax department has started sending out notifications to many of the foreign venture capital (VC) as well as private equity (PE) funds ever since a recent tribunal ruling was made against a US-based investment company known as Tiger Global.
The notices are seeking information on capital gains and taxation of investments that have been executed through such structures. The move has reportedly come on the heels of the ruling by the Income Tax Appellate Tribunal (ITAT) against Tiger Global’s Mauritus-based firm on the plea by the firm to exempt itself from taxation in line with the tax treaty between the two nations.
According to tax specialists, this ruling has encouraged authorities to review similar structures adopted by overseas investors, especially where investments are channeled through countries with low tax rates like Mauritius, Singapore, and the Cayman Islands.
“The Tiger Global order has effectively reopened the debate on the benefits of substantive requirements for treaty benefits,” remarks a senior tax advisor. “What is now being examined by the tax authorities is whether the foreign funds really qualify for capital gains benefits.”
The past decade or so saw significant contributions from Foreign VC and PE funds toward India’s startup ecosystem. These funds invested in various industries such as technology, financial technology, e-commerce, and clean energy. The tax situation may impact these funds at a time when the sentiment may be hit by the economic slowdown globally.
According to executives of the industry, they do not imply automatic tax demands but could spark prolonged legal battles. “These are information-seeking notices for now, but they increase compliance costs and regulatory risk for offshore investors,” said a fund executive who declined to be named.
While the government has attempted to strike a balance between attracting foreign investments and imposing stricter regulations on tax compliances in recent years, amendments to tax treaties between India, Mauritius, and Singapore in 2016 have created fodder for concerns, as investments entered into prior to the amendments continue to remain a point of contention.
Tax experts expect that more foreign funds will likely receive a notice in the coming months, which could result in representations seeking further certainty on the way in which a previous investment will be taxed.
For now, the precedent set with this decision seems to be building up to potentially altering the way in which foreign capital is taxed in India’s private markets.
