For decades, Mauritius served as the primary gateway for foreign investors entering Indian markets. The India–Mauritius Double Tax Avoidance Agreement (DTAA) allowed investors to benefit from a favourable capital gains tax regime while maintaining dollar-denominated accounts.
As a result, a large number of foreign funds structured their investments through Mauritius-based entities, particularly during India’s startup boom and the rise of large-scale digital platforms.
Substance Over Structure
Tax experts say the Supreme Court’s ruling has placed “substance” at the centre of treaty eligibility. According to the judgment, merely registering an entity in Mauritius is insufficient if key management decisions, control, and commercial activity are carried out elsewhere.
Legal and investment professionals note that entities existing only on paper, without meaningful operations or decision-making authority in Mauritius, may now face closer scrutiny from Indian tax authorities.
Impact on Venture Capital and PE Funds
The ruling’s implications extend beyond Tiger Global. Venture capital and private equity funds that pooled global capital through Mauritius or similar low-tax jurisdictions may be required to justify their operational presence and commercial rationale.
Industry executives caution that the impact will not be uniform. Funds with genuine teams, offices and investment committees based in Mauritius may still qualify for treaty benefits, while others could see past and future exits reassessed.
Indirect Transfers Under the Lens
The verdict also raises questions around indirect share transfers, where offshore entities derive substantial value from Indian operations. Such structures were common in high-profile transactions involving Indian startups with overseas holding companies.
Tax specialists believe the court’s interpretation could lead to greater ambiguity for investments routed through jurisdictions beyond Mauritius, especially where capital gains arise from offshore transactions linked to Indian assets.
Post-2017 Treaty Amendments
India amended its tax treaty with Mauritius in 2017, clarifying that capital gains tax on Indian securities would largely be payable in India. Several funds have since voluntarily paid taxes on post-amendment exits to reduce litigation risk.
However, uncertainty remains over whether earlier transactions could face renewed examination, depending on how tax authorities interpret the latest ruling.
What Investors Should Watch
Chartered accountants and legal advisors recommend that foreign investors reassess their holding structures, governance frameworks and documentation. Demonstrating independent commercial purpose, local decision-making and regulatory compliance will be critical going forward.
Experts also advise funds to closely monitor guidance from the Income Tax Department and future court rulings that may further define the scope of treaty benefits.
Broader Implications for India’s Investment Climate
While the ruling strengthens India’s tax enforcement framework, some market participants fear it could temporarily dampen investor sentiment. Others argue that clarity on substance requirements will ultimately promote more transparent and sustainable investment practices.