The AAR's recent judgment on Tiger Global will give ammunition to tax officers to go beyond the legal form of an entity claiming tax exemption under bilateral treaties and assess its management and control, experts said.
The Authority for Advance Rulings (AAR) in a recent order rejected Tiger Global's application for exemption from payment of capital gains tax on sale of its stake in Flipkart to Walmart in 2018.
US-based PE firm Tiger Global had invested in Flipkart through its Mauritius arm.
The AAR, in its ruling, said the investment was routed through the Mauritius entity only to benefit from the India-Mauritius tax treaty while the 'head and brain' of the company was in the US.
Consulting firm AKM Global Tax Partner Amit Maheshwari said this new angle of analysing holding structures with respect to management and control will lead to more litigation and challenge by tax authorities.
"The (India-Mauritius) treaty does not have the minimum standards to prevent treaty abuse as yet. The tax authorities are bound to challenge these structures by taking recourse to GAAR (General Anti-Avoidance Rule) and using these judgments to allege lack of substance and treaty abuse," Maheshwari said.
Experts said the AAR ruling emphasises on the substance over form of holding structure of an entity.
T
he tax department in future will seek details of bank account signatory, how decision making is happening and where is the board of directors to decide on where the 'head and brain' of a particular entity is, they said.
CA firm Rajeshree Sabnavis & Associates founder Rajeshree Sabnavis said, "This decision of AAR will definitely give impetus to tax officers to go beyond the legal form of the entity to assess the management and control aspect of holding structure also in cases of indirect transfer of shares routed through Mauritius to deny the beneficial claim that such indirect transfer by Mauritius resident should only be taxable in Mauritius under the Indo-Mauritius Tax Treaty."
Walmart Inc had completed the acquisition of 77 per cent stake in Flipkart for about USD 16 billion in August 2018. As many as 44 shareholders of Flipkart had sold their holdings to Walmart.
As per the provisions of the income tax law, Walmart had to deduct withholding tax on payments made to sellers and deposit it with the Indian authorities.
As per domestic tax law, long-term capital gains tax is levied at 20 per cent for shares sold by foreign investors after 24 months of purchase.
Withholding tax, or retention tax, is an income tax to be paid to the government by the payer of the income rather than the recipient of the income. The tax is withheld or deducted from the income due to the recipient.
Sabnavis said the AAR has held that grand-fathering provided for investment made prior to April 1, 2017 under the India-Mauritius treaty does not automatically extend to the sale of shares of a foreign company having substantial interest in India and it has limited the application of the treaty provisions to direct sale of shares of an Indian company only.
"This could trigger litigation requiring the taxpayer to substantiate the bona fides of the investments made prior to 1 April 2017 and routed through Mauritius in case of indirect transfer of shares of foreign companies deriving substantial value from India," Sabnavis said.
Maheshwari said lately Mauritius structures are being challenged very frequently in AAR due to a specific provision which allows the authority to reject the application in case the transaction is prima facie designed to evade tax.
The Authority for Advance Rulings (AAR) in a recent order rejected Tiger Global's application for exemption from payment of capital gains tax on sale of its stake in Flipkart to Walmart in 2018.
US-based PE firm Tiger Global had invested in Flipkart through its Mauritius arm.
The AAR, in its ruling, said the investment was routed through the Mauritius entity only to benefit from the India-Mauritius tax treaty while the 'head and brain' of the company was in the US.
Consulting firm AKM Global Tax Partner Amit Maheshwari said this new angle of analysing holding structures with respect to management and control will lead to more litigation and challenge by tax authorities.
"The (India-Mauritius) treaty does not have the minimum standards to prevent treaty abuse as yet. The tax authorities are bound to challenge these structures by taking recourse to GAAR (General Anti-Avoidance Rule) and using these judgments to allege lack of substance and treaty abuse," Maheshwari said.
Experts said the AAR ruling emphasises on the substance over form of holding structure of an entity.
T
he tax department in future will seek details of bank account signatory, how decision making is happening and where is the board of directors to decide on where the 'head and brain' of a particular entity is, they said.
CA firm Rajeshree Sabnavis & Associates founder Rajeshree Sabnavis said, "This decision of AAR will definitely give impetus to tax officers to go beyond the legal form of the entity to assess the management and control aspect of holding structure also in cases of indirect transfer of shares routed through Mauritius to deny the beneficial claim that such indirect transfer by Mauritius resident should only be taxable in Mauritius under the Indo-Mauritius Tax Treaty."
Walmart Inc had completed the acquisition of 77 per cent stake in Flipkart for about USD 16 billion in August 2018. As many as 44 shareholders of Flipkart had sold their holdings to Walmart.
As per the provisions of the income tax law, Walmart had to deduct withholding tax on payments made to sellers and deposit it with the Indian authorities.
As per domestic tax law, long-term capital gains tax is levied at 20 per cent for shares sold by foreign investors after 24 months of purchase.
Withholding tax, or retention tax, is an income tax to be paid to the government by the payer of the income rather than the recipient of the income. The tax is withheld or deducted from the income due to the recipient.
Sabnavis said the AAR has held that grand-fathering provided for investment made prior to April 1, 2017 under the India-Mauritius treaty does not automatically extend to the sale of shares of a foreign company having substantial interest in India and it has limited the application of the treaty provisions to direct sale of shares of an Indian company only.
"This could trigger litigation requiring the taxpayer to substantiate the bona fides of the investments made prior to 1 April 2017 and routed through Mauritius in case of indirect transfer of shares of foreign companies deriving substantial value from India," Sabnavis said.
Maheshwari said lately Mauritius structures are being challenged very frequently in AAR due to a specific provision which allows the authority to reject the application in case the transaction is prima facie designed to evade tax.
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