In a significant ruling, India's Supreme Court has determined that Tiger Global's sale of a $1.6 billion stake in Flipkart to Walmart will be liable for capital gains tax. The decision, announced on Thursday, has sparked widespread discussions on its implications for foreign investments in India, particularly those routed through offshore jurisdictions like Mauritius. Experts warn that the verdict could introduce uncertainty into the tax landscape for private equity (PE) firms and multinational corporations (MNCs) operating in the country.

The case centers on what tax authorities describe as an indirect transfer of shares. Tiger Global, a prominent investor, utilized a Mauritius-based entity as an intermediary in the transaction. According to tax experts, this structure falls under the category of indirect transfers, distinct from direct investments by foreign portfolio investors (FPIs) registered with India's Securities and Exchange Board (SEBI). Experts emphasized that the ruling applies specifically to the facts of this case but highlights broader principles of tax avoidance that date back to Supreme Court precedents from the 1960s.

Tax experts further explained the historical context, noting that anti-avoidance rules—such as those ensuring substance over form—have long been part of Indian jurisprudence. They referenced landmark cases like McDowell's, which reinforced that arrangements lacking commercial substance could not claim statutory benefits. Additionally, they pointed out key legislative changes: the reintroduction of long-term capital gains tax in the 2018 budget, effective from January 1, and amendments to the India-Mauritius tax treaty starting April 1, 2017. Crucially, these amendments included a grandfathering clause to protect investments made before that date.

Legal experts dealing with corporate matters described the Supreme Court's decision as "largely unexpected" and a "disruptive shift" in tax treaty jurisprudence. They argued that it negates the government's grandfathering commitments—both statutory and administrative—for investments predating April 1, 2017. This, they said, infuses a high degree of tax uncertainty and litigation risks for legacy structures used by PE investors and others in Indian companies. "It allows tax authorities to disregard administrative assurances and examine the commercial substance behind structures," they noted, marking a departure from established practices. They highlighted the public importance of the issue, citing the court's checkered history in interpreting tax treaties and the need for greater certainty to attract foreign investors.

Both taxation as well as legal experts called on the government to intervene with clarifications, possibly through rule amendments or direct assurances to investors, to mitigate the uncertainty. As the discussion concluded, there was agreement that the ruling's full impact on future PE investments routed through such jurisdictions warrants further scrutiny. Analysts anticipate more developments, which could reshape India's attractiveness as an investment destination amid ongoing global tax reforms.