India: Tiger Global tax ruling setback to hit startup exits

Photo: REUTERS/Beawiharta

US private equity firm Tiger Global’s capital gains tax setback on Tuesday is the latest in a series of disappointments for foreign investors who have routed money through Mauritius, with the tax authorities denying benefits under a tax treaty they suspect is being abused to avoid tax.

According to legal experts, continued denial of treaty benefits, despite the new India-Mauritius tax treaty protecting investments from Mauritius before 2017, is likely to have ramifications on future exits by startup investors who have routed money from well-known tax havens.

On Tuesday, the Authority for Advance Rulings (AAR) rejected a petition by US private equity firm Tiger Global claiming an exemption from tax on capital gains resulting from the 2018 sale of its Flipkart stake to Walmart. Tiger Global had claimed nil withholding tax on the capital gains, since its investment firms that made the Flipkart investment were based in Mauritius.

“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, Dhruva Advisors.

In 2018, Mauritius-based entities, which were part of Tiger Global, had sold their stakes in Flipkart Singapore to a Luxembourg-based company for over 14,500 crore, and, subsequently, had sought an advance ruling for zero withholding tax. The taxman objected that the transaction purely for tax evasion, and AAR accepted its view.

While investments through the Mauritius route and tax litigation have always been a grey area in taxation matters, the recent cases are being viewed by investors as setting a precedent, which will make them pay 21% tax on exits.

At least four rulings by AAR, including the latest one against Tiger Global, have labelled investments through Mauritius as a tax avoidance route and thus not eligible for treaty benefits.

In another ruling in October 2019, the AAR had denied the same treaty benefit in a case from a decade ago (the AAR ruling did not mention the name of the company). Here, too, the authority had agreed with the tax department that Mauritian entities were merely lending their name to seek treaty benefit.

“The 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, joint managing partner of law firm J Sagar Associates.

The article was first published on livemint.com

 

 

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.