The Supreme Court’s recent ruling upholding a ₹14,500-crore ($1.7 billion) tax demand against US-based investment firm Tiger Global could have wide-ranging implications for venture capital (VC) and private equity (PE) investors who have long used Mauritius-based entities to invest in Indian companies. While the verdict directly impacts Tiger Global, experts say its ripple effects may extend to several other foreign investors, depending on how their investment structures are designed and operated. 

According to investors, lawyers and chartered accountants, the impact of the judgment will not be uniform across all funds. Instead, it will depend on whether investments were made directly or indirectly into Indian companies, and whether the Mauritius-based entities had real commercial substance or existed largely on paper. 

“Substance is now the decisive test and if the real decision-making or control lies outside of Mauritius, the benefits of the treaty can be denied,” said one investor. The person added, “The risk of being scrutinised is higher if the Mauritius vehicle exists only on paper, and decisions are taken in India, the US or Singapore.” 

The investor further explained that tax considerations were not the only reason firms set up entities in jurisdictions like Mauritius or the Cayman Islands. “Apart from tax avoidance, firms also set up Mauritius or Cayman Island entities to pool global capital if they have limited partners from across jurisdictions like the US, Europe, Singapore and Middle East,” he said. 

For years, Mauritius has been a preferred gateway for foreign investments into Indian equities, largely because of the Double Tax Avoidance Agreement (DTAA) between India and Mauritius. This treaty allowed investors to benefit from a favourable capital gains tax regime. However, experts now believe that funds which relied heavily on this treaty could face closer scrutiny from Indian tax authorities. 

“Foreign Investors chose Mauritius as it allowed them to maintain dollar accounts and get the treaty benefits of a beneficial capital gains regime,” said Siddarth Pai, founding partner of 3one4 Capital. He pointed out that Mauritius was often preferred over Mumbai as the entry point for Indian equity investments. 

Pai also noted that Mauritius-based funds have historically faced intense tax litigation, particularly around whether they had real substance in the country. “Funds based in Mauritius often faced extensive tax litigation on the substance of their operations in Mauritius and where the actual decisions were taken,” he said. He added that, to counter this, fund partners and managers often had to be physically based in Mauritius, with investment and divestment decisions being made there. 

However, Pai highlighted a key concern following the Supreme Court ruling. “The biggest unknown for investors with Mauritius structures is whether previous exits will be freshly scrutinised,” he said. 

A chief financial officer (CFO) of a large venture capital firm that used a Mauritius-based structure said the government’s intent became clear when India amended its DTAA with Mauritius in 2017. “The intent was made clear by the government that tax on any deal must be paid in India,” the CFO said, speaking on the condition of anonymity. 

The CFO explained that the firm had several investments made before 2017, which were exited after the treaty amendment. “We had several pre-2017 investments that we sold post-2017. However, we paid full tax in India,” he said. 

Tax experts believe that the key issue going forward will be the requirement to demonstrate “substance” in low-tax jurisdictions. Pallav Narang, partner at chartered accountancy firm CNK & Associates, said, “VC firms investing through low tax jurisdictions will have to demonstrate ‘substance’, in other words a core financial or commercial purpose, for locating their offices in such low tax jurisdictions.” 

Narang added that if such substance is absent, “their transactions may be looked at in greater detail and subjected to tax in India.” 

Lawyers have also pointed out that the Tiger Global ruling could set a broader precedent beyond just capital gains cases. They believe it may affect other treaty-based arrangements as well. 

“The ruling will be applied in other treaty situations as well, going beyond just cases of capital gains,” said Abhishek Goenka, partner at Aeka Advisors, a firm specialising in tax issues and regulations. He further said, “The finding that the tax treaties are not intended to apply to indirect share transfers will also create ambiguity for investments from several other jurisdictions.” 

Indirect transfers refer to transactions involving companies that are incorporated outside India but derive a significant portion of their value from Indian operations. This was a key aspect of the Tiger Global case. Flipkart, for instance, operated primarily out of Bengaluru but had its parent company based in Singapore. 

During the 2018 transaction, Tiger Global’s Mauritius entity sold its shares in Flipkart’s Singapore-based parent company to a Walmart-affiliated entity, which was also located outside India. Despite the transaction taking place offshore, Indian tax authorities argued that the underlying value was derived from Indian operations. 

Tax specialists believe the Supreme Court’s reasoning is based on a “threshold” test. To claim benefits under the India-Mauritius tax treaty, an entity must first establish that it is a genuine resident of Mauritius with independent commercial substance. 

“The Supreme Court’s reasoning follows a ‘threshold’ logic: to claim any benefit under the India-Mauritius treaty, an entity must first prove it is a genuine ‘resident’ with independent commercial substance,” said Ankit Jain, partner at New Delhi-based accounting firm Ved Jain & Associates. 

Jain explained that the court viewed Tiger Global’s Mauritius entities as mere conduits. “By characterising the Tiger Global Mauritius entities as ‘fronts’ or ‘conduits’ for their US-based parent, the court held they were effectively non-residents for treaty purposes,” he said.

Experts also warned that the ruling could impact foreign portfolio investors involved in high-risk derivatives trading, as similar treaty interpretations could be applied in those cases as well. 

Overall, the judgment signals a shift towards stricter scrutiny of offshore investment structures and reinforces the importance of genuine commercial substance. While Mauritius may still remain an investment route for some, the ruling suggests that it may no longer be the easy gateway it once was for foreign capital entering India.