Amidst the tensions in trade, another pot is stirred by the Supreme Court’s judgement in the Tiger Global case. The principles of tax certainty and rule of law are being used to evoke unfairness. However, comparisons with the Vodafone case is nostalgia rooted in incomplete understanding of the law. The world of tax has moved on in its approach in the last decade. There is lower tolerance for tax avoidance that involves arranging operations primarily to reduce tax liability. As a result, tax treaties that are primarily meant to allocate taxing rights between the country that receives investment and the country that patriates, now also remedies treaty abuse by an extension of purpose specified in the preamble and the inclusion of anti-abuse measures like the limitation of benefit clause. Thus archaic thinking that the treaty only goes as far as to decide who gets to tax is now out of date. India amended its tax treaty with Mauritius that is well known as source for routing investments by third countries. At the same time, the general anti-avoidance rule in India’s domestic tax law ensures that treaties do not give a free run to structure transaction primarily for the purpose of reducing taxes. In the case of a conflict between treaty and GAAR the latter over-rides. The power to invoke GAAR is also reined in by reference to a panel and the taxpayer can present their case before the authority for advance ruling (AAR) now known as the Board of Advance Rulings (BAR) to seek clarity on whether the transaction is impermissible avoidance arrangement (IIA). The BAR, if it finds that it is prima facie such an arrangement can refuse the application. Tiger global is therefore the first case to test these procedural and legal changes. The primary source of dispute is the question if the AAR could indeed reject the application prima facie as avoidance.

In public imagination tax avoidance is explicitly egregious, however in practice the sophisticated structures require careful unpacking of the goings on. The case demonstrates that there can be layers of transactions that need to be unwound to understand and establish primary intent. When a shareholder sells a share of a company, there is a capital gains tax. When the investor is a resident of another country, then the capital gains tax is in accordance with the treaty provision. Which in this case was taxable in the country of residence- Mauritius. However, what happens when the shares of a non-resident entity, that derives its value from Indian assets, is exchanged in a jurisdiction outside the jurisdictions of the treaty pair, in this case Mauritius and India. That is, an indirect transfer of share takes place. This would require determination of residence of the entities and the source of income. There are ways to determine whether an entity is a resident of the country, as mentioned in the treaty, and in India tax residence certificate (TRC) issued by Mauritius is presented as proof. Though a heavily contested issue, the law states that TRC is an eligibility condition for residency and not the end of enquiry. The formal criteria that check where control and management exist, are necessary tools. Also, as per the treaty the capital gains from indirect alienation of shares is taxable in India.

The case opens up issues that will have to be considered by funds that invest India in the future as well as for Revenue. Since it is common practice to structure investments through Mauritius for approval and registration purposes, the question for tax authorities is how far back in the web of transactions would the authorities be willing look to reach the conclusion that it is an indirect transfer primarily to avoid tax. The fact that Flipkart was the only investment of the fund, raising the suspicion the pooling through such vehicle was mainly for avoidance. Where the pooling is more complex how the Revenue would respond. Second, in this instance the GAAR is not yet invoked and while the Court has ruled, the authority must establish process. Third, for funds the issue of how they structure their management including handing authority of approving and executing transactions, which in this case was shown to reside with a US taxpayer. Lastly, while FIIs have been excluded from the purview of GAAR, and so while that excludes a significant part of the investments, the longer term investments through the FDI route are covered and the distinction between arrangement and investment can be problematic.

As India matures as a destination for capital, the worry is that the investments may recede in response to the judgement. This assumes away that anti-avoidance was previously established through judicial pronouncements. The response therefore is exaggerated. In fact what is important is that the case tests whether the AAR’s decision can be refuted in a case that looks like tax avoidance, setting the process, thus far theoretical, in motion. Reporting of transactions and advance rulings under the tax law open up the possibility of early warning. Certainty is a virtue to aspire for, but it is crucial to answer for whom and at what cost.