India’s tax department is intensifying scrutiny of foreign investment firms. Following a Supreme Court decision, notices have been issued to several overseas venture capital and private equity houses. Mumbai: Emboldened by the Supreme Court’s decision to deny tax benefits to the US investment firm Tiger Global, India’s tax office has over the last fortnight served notices to at least seven overseas venture capital and private equity houses.
The Income Tax (I-T) department has sought a slew of information from these fund houses to examine their ‘substance’ in Mauritius and Singapore — the favourite jurisdictions for foreign investors setting up vehicles to bet on India.
In some communications, the tax department makes a reference to the court judgment on Tiger Global.
Invocation of GAAR
Tax officials, from Mumbai and Bengaluru, are trying to fish out details of these offshore investors, many of whose scrutiny assessment would become time-barred by March 31, 2026.
The investors picked for scrutiny are those who had either directly or indirectly sold their investments and have not paid tax on the deal profits by virtue of the treaties India has with Mauritius and Singapore.
The department believes additional facts on the Mauritius and Singapore arms would put it on a stronger footing in finalising the scrutiny orders, three people familiar with development told ET. The scrutiny assessment orders for tax year 2023-24 must be passed before the current financial year ends.
The PEs and VCs have to spell out sources of funds, signatories of bank accounts, roles of directors, details of ultimate beneficial owners, expenses and set-up in Mauritius and Singapore as well as details of entities to whom stocks were sold and whether the buyers were related parties.
“The nature and breadth of these inquiries indicates a clear intent to apply the principles emerging from the Tiger Global ruling across a wide spectrum of earlier acceptable Mauritius holding and fund structures, and it remains to be seen whether judicial anti-avoidance principles might be invoked alongside cases being escalated to the GAAR panel,” said Parul Jain, who heads the international tax practice at law firm Nishith Desai Associates. GAAR, or general anti-avoidance rule, was framed to discourage aggressive tax planning.
With tax authorities calling for information on buyers, “parallel proceedings against counterparties for alleged failure to withhold taxes cannot be ruled out,” she said.
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