Bye, treaty shopping, yeh Tiger zinda hai

Supreme Court on Thursday issued a landmark judgment in India's treatment of tax on capital gains by foreign investors by ruling that Tiger Global was liable to pay tax on sale of its stake in Flipkart to Walmart. Dispute arose because Tiger Global's investments were made prior to the period when India amended its treaty with Mauritius, through which investments were made, to plug exemptions to capital gains tax. The law is now settled that Indian taxmen can go beyond routing mechanisms for foreign investments, and probe the intention behind the specific arrangement. If there is reasonable doubt over routing of investments, grandfathering and residence clauses constitute weak arguments in India's evolving tax jurisprudence.

Import of the ruling is wide because it affects a class of investments made over a specific period to minimise tax incidence in India. GoI has made consistent efforts to discourage treaty shopping, and the current set of rules is watertight, and in keeping with international norms. Fresh investments into the country must flow through routes GoI deems kosher. Ambiguity exists over previous investments. But the tax administration can, at best, examine them on their merits. The development is unlikely to alter India's investment climate. Tax optimisation is not the principal consideration in investment decisions. Returns available to foreign investors in India arise from a far more intricate interplay of economic factors. India's tax rates and policy orientation compare favourably in the global context, and have low deterrence value for prospective investors.

The top court's verdict brings clarity to a period when venture capital was peaking. India's regulators have worked on dissipating froth in startup valuations. The centre of gravity is shifting back to the country because of its business prospects. Offshore tax avoidance structures are becoming less relevant as the Indian startup ecosystem matures. Courts are weighing in on this vision of entrepreneurship in the country.