Government Efforts to Restore Investor Confidence Falter

Supreme Court's Tiger Global Ruling Sparks Uncertainty in Indian Investments

The Supreme Court's ruling on Tiger Global earlier this year has significantly altered the landscape for foreign investments in India. Prior to this judgement, the date of investment up to April 1, 2017, along with a Tax Residency Certificate, was seen as a crucial barrier to obtain lower tax benefits under Double Taxation Avoidance Agreements (DTAA) with countries like Mauritius. However, the judgement dismantled this shield by distinguishing 'investment' from an 'arrangement,' allowing tax authorities to invoke General Anti-Avoidance Rules (GAAR) and tax transactions regardless of the date of investment.

This judgement sent shockwaves not just to the tax community but also to the global investment community, causing significant uncertainty in Indian investments. The unpredictable nature of taxation in India led to a reaction of extreme caution while investing in the country, resulting in hardened indemnities, higher risk pricing, and valuation adjustments. Reports of 'Capital Flight' and tightening of growth-stage capital were also witnessed.

In an effort to mitigate this damage, the Government of India notified an amendment to the GAAR Rules on April 1. The revision clarifies that investments made before April 1, 2017, would not attract GAAR even if they are sold after such date. However, the amendment has been made prospective in nature and will only apply to sale transactions that happen on or after March 31, 2026.

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This prospective nature of the amendment defeats the purpose of making the amendment, which was to regain the trust of the global investment community. Continuing to tax transactions that have already occurred between 2017 and 2026 undermines the goal of establishing a stable tax regime. The amendment acknowledges a mistake in policy or interpretation but refuses to fix the consequences for those already affected, creating a "split reality" for investors.

By limiting this relief to future sales, the government is essentially saying, "We recognize this is unfair, but we are going to keep the unfair tax collected from the last nine years anyway." This sends a message of opportunism rather than principled governance. The only benefit of this amendment is to those who have already invested prior to 2017 and have not yet cashed out, providing no incentive for further investment into India.

To mitigate this damage, the amendment should be made retrospective, covering even those transactions that were undertaken in the last nine years. This will help the world see India as a predictable terrain and reinstate global confidence in the country as a stable, predictable, and rule-bound terrain for long-term capital. Taking this step is essential to prove that India honours its tax promises and maintains a stable landscape for capital.

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