SC ruling on Tiger Global shifts tax lens from documents to investment legitimacy
In a landmark ruling on Thursday, the Supreme Court of India ruled that Tiger Global is liable to pay capital gains tax on its 2018 exit from Flipkart. YourStory breaks down what it means and how it can impact past investments made from tax friendly jurisdictions.
In 2018, venture capital firm Tiger Global, through its Mauritius entity, sold its stake in Flipkart Singapore, the parent company of ecommerce company Flipkart, to Walmart for about $1.6 billion. Eight years later, in 2026, the Supreme Court of India has directed the VC firm to pay $1.7 billion in taxes to the Indian Income Tax Department.
The Supreme Court’s ruling is significant because it cuts through the power of a Tax Residency Certificate (TRC) and demands more substance to claims made by entities that are housed in tax friendly jurisdictions. However, it is important to note that the ruling does not impact current and future foreign investments in India.
In 2017, India amended the 1983 India-Mauritius Tax Treaty whereby India acquired the right to tax capital gains arising from the sale of shares in an Indian company, marking the end of the zero-tax privilege that had existed. This law changed prospectively and since no law can change retrospectively, foreign investors have since accounted for this in investments made since.
This was the argument that had won Tiger Global a favourable ruling in the High Court because the firm had first invested in Flipkart Singapore, the holding company of Flipkart India, in 2009, and exited the company in 2018. Since the law cannot be applied retrospectively, the VC firm had argued that it can reap the benefits of the India-Mauritius Tax Treaty.
Substance vs documents
While the Flipkart transaction took place in 2018, the Supreme Court noted that an arrangement is considered impermissible if the main purpose is to get a tax benefit and it lacks “commercial substance”, which means the Mauritius entity was found to have no real office or employees.
This indicated that the company was set up specifically to claim the benefits of the treaty.
Under these circumstances, the Supreme Court found that Tiger Global’s Mauritius offices functioned merely as puppets controlled by the US headquarters, making the arrangement impermissible under law and thereby not entitled to claim exemption under the India-Mauritius treaty that Tiger Global was using to not pay capital gains tax.
Moreover, while Tiger Global’s Mauritius entity sold shares in Flipkart’s parent company which was registered in Singapore, the court noted the value for Flipkart’s parent company was created from its Indian operations.
Why did the Indian Income Tax Department zero in on Tiger Global?
In short, it did not. When Walmart acquired Flipkart in 2018, the company had 44 shareholders who sold their stake during the deal. According to reports, investors like SoftBank, eBay, and Naspers, among others, chose to pay the tax or had it withheld by Walmart which was then deposited to the tax department.
At the time, Walmart had deposited Rs 7,439 crore on behalf of 10 shareholders.
While the majority of the investors abided by the instructions from the tax department, Tiger Global went down the legal route, fighting it out in the Authority for Advance Rulings (AAR), then the High Court, and finally the Supreme Court.
Moreover, the tax department wanted to ensure that the Flipkart deal did not repeat the circumstances of the Vodafone Case—one of the most famous tax disputes in recent years in the country. The Indian Income Tax Department had demanded $2.2 billion in capital gains tax when UK-based Vodafone bought a 67% stake in Indian company Hutchison Essar from its Hong Kong-based Hutchison Group.
Back then, the Supreme Court ruled in favour of Vodafone noting that Indian tax laws only covered direct transfers and in this case, Vodafone had sold a foreign company that indirectly held Indian assets and thereby the government will not be allowed to tax it.
The income tax department was determined to not let a similar ruling ensue when it came to Tiger Global.
What does this mean for foreign investors?
According to Suraj Malik, Managing Partner and Founder at Legacy Growth, this ruling is not expected to impact direct investments made in India after April 2017 where the treaty benefits no longer were available.
“Investors post the treaty amendment in 2017 and introduction of indirect transfer taxation are anyways factoring the tax on exit since that is the law of the land for foreign investors who invest in India, and will have to pay capital gains taxes,” he told YourStory.
Malik noted that this ruling will impact the past more than the present. Unicorns preparing for their IPO journey and companies that have listed but still have foreign investors that have not exited completely will come under the radar as per this judgement.
“The tax authorities will likely go after exit transactions claiming treaty benefit for investments made prior to April 2017 and tax treaty claims on indirect transfers where the entity seeking treaty benefit lacks underlying substance ,” he noted.
However, the ruling also casts a shadow of uncertainty for foreign investors. If TRC, which was previously enough to validate the existence of an entity in a country and thereby claim the benefits of a treaty, can no longer hold sole power in a court room, what would an investor need to prove its residency?
The ruling can create a sense of anxiety among investors because there is no understanding on what would be sufficient to prove that these entities are residents in a tax friendly jurisdiction.
“The ruling leaves open aspects that would bring uncertainty to transactions. What would be sufficient to prove substance in addition TRC will remain subjective and result in protracted litigation,” Malik pointed out.