The Centre has changed the income tax law to allow income arising from the transfer of investments made prior to April 1, 2017, to be outside the ambit of GAAR, easing concerns among global investors after a landmark Supreme Court judgment in the Tiger Global case raised the spectre of retrospective scrutiny.
The apex court ruling in January said Tiger Global must pay taxes on its $1.6 billion sale of a stake in Flipkart in 2018. The judges said Tiger Global used its Mauritius units only as “conduits”, and no benefit under an international treaty for pre-2017 investments would apply.
The amendment to Income Tax Rules, 2026 by the Central Board of Direct Taxes on the non-applicability of the anti-avoidance provision under GAAR (General Anti Avoidance Rule) to investments made before FY18 will bring relief to buyout firms sitting on billions of dollars of investment. Concerns were raised from many quarters that grandfathering provisions might not apply after the Tiger Global ruling.
“The CBDT notification dated March 31 clarifies the rules regarding grandfathering provisions for certain investments and assets to ensure that gains accrued up to a specific cut-off date are protected from subsequent changes in tax regulations. The impact of this notification is that it preserves the tax treatment for gains realised before April 1, 2017, allaying fears of retrospective taxation,” said Riaz Thingna, partner, Grant Thornton Bharat.
India, one of the world’s fastest-growing major economies, has long attracted foreign investors such as private equity firms like Blackstone, KKR and Warburg Pincus. But tax uncertainty has remained a key concern, from treaty interpretation and import scrutiny to prolonged litigation.
In another high-profile tax saga, Vodafone won its case against a $2 billion retrospective Indian tax demand in 2020 after more than a decade of legal battles with New Delhi, including international arbitration at The Hague.
Some tax experts, however, advised caution.
Niranjan Govindekar, partner, corporate tax, tax & regulatory Services at BDO India, observed that while protection to pre-2017 investments is provided, the protection has been spelt out only for transfer of investment.
“The income other than capital gains from the transfer of such investments could be subject to GAAR scrutiny, such as dividend income,” he observed.
According to Amit Baid, head of tax, BTG Advaya, the amendment appeared to address the uncertainty that emerged after the recent Tiger Global ruling on GAAR grandfathering.
“While Tiger Global may remain relevant on broader questions of substance and treaty abuse, this amendment materially reduces its relevance on the issue of GAAR grandfathering for pre-1 April 2017 investments,” Baid noted.
M&A tax partner at Nangia Global Advisors Sandeepp Jhunjhunwala said that while the amendment appears to safeguard the income arising from investments made before April 1, 2017, the Tiger Global doctrine preserves GAAR’s reach over the broader arrangement.
“This raises a critical question for investors — whether grandfathering protects the investment but leaves the holding structure exposed, thereby underscoring that the contours of India’s tax anti-avoidance regime continue to operate within a highly technical, fact-intensive matrix, marked by significant interpretive indeterminacy,” Jhunjhunwala said.
