Tiger Global tax ruling to have wider impact on startup exits


MUMBAI :
The rejection of application of private equity firm Tiger Global by Authority for Advance Rulings (AAR) for nil withholding tax on capital gains from its exit from Flipkart in 2018 wider ramifications on future exits by startup investors, where investments into India routed from well known tax havens.

The tax authorities in the past eight months have increased scrutiny of share sales claiming tax benefits under Mauritius treaty and recent instances suggest that they are taking the view that many Mauritius structures have been set up solely for tax avoidance purposes.

At least four rulings by Authority of Advance of Rulings (AAR), including one against private equity giant Tiger Global on their Flipkart exit, has labelled investment through Mauritius as tax avoidance and thus not eligible for treaty benefits.

Investments made before 2017 were grandfathered under the new double taxation avoidance agreement (DTAA) between India and Mauritius but these AAR rulings have denied treaty benefits.

While investment through Mauritius route and tax litigation have always been a grey area in taxation matters, but the recent cases are being viewed by investors as setting a precedent, wherein they are liable to pay 21% tax on exits.

“The AAR ruling is bound to create flutters in the PE industry. For funds, it will be important to assess the management and control aspects of their holding structures on a continuous basis, as it could eventually be relevant upon exit (due to tax liability),” said Vaibhav Gupta, partner at Dhruva Advisors.

On Wednesday the AAR had rejected applications made by Mauritius based entities of Tiger Global when it sold shares held in a Singapore company, as part of a multi-billion-dollar transaction to offload its stake in Flipkart to US retail giant Walmart.

Mauritius based entity part of a giant private equity fund sold its stake in Flipkart Singapore in 2018 to a Luxembourg based co. for over Rs. 14,500 crores and subsequently sought an AAR for zero withholding tax. The tax man objected to this citing that the transaction for purely aimed at tax evasion and AAR accepted revenue department’s stance.

In ruling in October 2019 AAR ruling had denied benefit of exemption of capital gains on multi-billion-dollar sale of shares of Indian Company, which took place a decade ago. Even here the authority agreed with the tax man, that Mauritian entities were merely lending their name to seek treaty benefit. This comes nine years after the deal closed and payment to the seller did not account for long term capital gains tax (LTCG) at effective rate of 21.012%.

“Investor community had begun to believe that acquisition of Indian companies made by Mauritius or Singapore entities prior to April 1, 2017 were grandfathered and therefore would not suffer capital gains tax on exit. However, this decision of AAR will have the effect of unsettling this understanding and could give fresh impetus to litigation based on bona fides of the investments being routed through such jurisdictions,” said Vivek Chandy, Vivek Chandy, joint managing partner at law firm J Sagar Associates.

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