Why in news?

The Supreme Court of India has ruled that venture capital firm Tiger Global’s $1.6-billion stake sale in Flipkart to Walmart is subject to taxation.

The verdict, closely watched by foreign investors, is seen as a landmark decision that could influence cross-border deal structures and have wider implications for India’s startup ecosystem.

What’s in Today’s Article?

• Dispute Over India–Mauritius Tax Treaty
• Background: Tiger Global’s Flipkart Investment
• Implications of the Verdict for Indian Startups and Investors
• Startup Funding Slowdown Amid Investor Caution

Dispute Over India–Mauritius Tax Treaty

• The case arose from Tiger Global’s 2018 exit, executed through its Mauritius-based entities.
• Tiger Global claimed protection under the India–Mauritius Double Taxation Avoidance Agreement (DTAA).
  • A DTAA is a bilateral treaty to prevent the same income from being taxed in both nations — the country where the income is earned and the country where the company is based out of.
• However, the Supreme Court ruled that the DTAA benefit could not be extended in this case.
• Court Rejects Treaty Benefits, Overturns High Court Order
  • In denying DTAA protection, the Supreme Court overturned an August 2024 ruling of the Delhi High Court, which had set aside a 2020 decision of the Authority for Advance Rulings (AAR).
  • The AAR had earlier concluded that the transaction was prima facie structured to avoid tax.
• Broader Implications for Startup Investments
  • Mauritius had long been a favoured investment route into India due to the non-taxability of capital gains until 2016.
  • The judgment comes amid slowing startup funding, as investors increasingly prioritise profitability and clear tax certainty, potentially reshaping how foreign capital approaches Indian startup exits.

Background: Tiger Global’s Flipkart Investment

• After acquiring a stake in Flipkart, Mauritius-based entities of Tiger Global—Tiger Global International II, III, and IV Holdings—went on to invest in several Indian companies.
• Claim for Tax Exemption - Following the stake sale, the Tiger Global entities sought a “nil” withholding tax certificate from Indian tax authorities. They argued that capital gains were exempt under the India–Mauritius DTAA due to the “grandfathering” clause for shares acquired before April 1, 2017.
  • Grandfathering essentially means exempting an activity from a new law or regulation.
• Tax Authorities’ Rejection - Indian tax authorities rejected the request, concluding that the Mauritius entities lacked independent decision-making. They held that real control over share purchases and sales did not rest with these entities.
• Authority for Advance Rulings (AAR) Decision - The matter was taken to the Authority for Advance Rulings, which in 2020 dismissed Tiger Global’s claim.
  • The AAR found that the investment structure was primarily designed to obtain DTAA benefits and that effective control lay outside Mauritius—particularly in the United States—through a complex web of entities.
• Delhi High Court Intervention - On appeal, the Delhi High Court overturned the AAR ruling, holding that the conclusion of tax avoidance was arbitrary and unsustainable.
• Supreme Court’s Final Word
  • The Supreme Court of India reversed the High Court’s decision.
  • It held that DTAA protection applies only where assets are directly owned by a Mauritian entity’s permanent establishment.
  • The Flipkart transaction, he ruled, fell outside this scope—rendering the gains taxable in India.

Implications of the Verdict for Indian Startups and Investors

• End of Automatic Treaty Benefits - Tax experts warn that the ruling weakens automatic reliance on the India–Mauritius DTAA. Merely holding a Tax Residency Certificate (TRC) will no longer guarantee capital gains tax exemption.
  • TRC is an official document from a country’s tax authority.
  • It proves that an individual or entity is a tax resident there for a specific period. This is crucial for claiming benefits under a DTAA.
• Substance Over Form Becomes the Test - The judgment reinforces a shift toward examining economic substance. Investors must now show genuine commercial rationale, autonomous decision-making, and real operations in treaty jurisdictions.
• Higher Tax Uncertainty and Litigation Risk - According to practitioners, the ruling raises uncertainty for venture capital and private equity exits. Exit planning, valuations, and indemnities may need reassessment amid increased scrutiny and potential disputes.
• Impact on Offshore Investment Structures - Structures routed through Mauritius or Singapore—especially pre-2017 investments—could face closer examination. While closed cases may not reopen automatically, reassessments are now more likely where legally permitted.
• Costlier Risk Management - Experts anticipate tax insurance and indemnity mechanisms becoming scarcer and more expensive, adding to compliance costs and complicating deal-making for startups and foreign investors alike.

Startup Funding Slowdown Amid Investor Caution

• The Supreme Court ruling comes against the backdrop of a broader slowdown in India’s startup funding.
• In 2025, tech startups raised $10.5 billion, down 17% from 2024 and 4% from 2023. While seed-stage funding fell sharply, early-stage investments showed resilience, signalling selective but continued investor confidence.