Buyout firms sitting on billions of dollars of legacy assets in India got some relief this week, when the country’s finance ministry said it won’t apply anti-tax avoidance laws to investments made before April 1, 2017.
The ministry’s tax officials clarified that general anti-avoidance rules won’t apply to any investments made before that date in a gazette notice issued on March 31. That removes a major question facing legacy private equity and venture investments in the country.
The move follows a Supreme Court ruling in January which ordered New York-based Tiger Global to pay capital gains on a 2018 sale of shares in e-commerce company Flipkart, after the court decided not to recognize exemptions under a tax treaty with Mauritius. The decision set off alarm bells among foreign investors, creating widespread uncertainty about how much they would be liable to pay following exits on old deals.
“The recent CBDT notification is a narrative correction in light of the recent Tiger judgment and the subsequent ambiguity it generated,” said Siddarth Pai, co-founder of venture capital firm 3one4 Capital, referring to India’s Central Board of Direct Taxes.
It’s unclear whether the decision will apply to Tiger Global itself. The finance ministry had previously said the firm would have to pay tax on gains of more than 145 billion rupees ($1.5 billion) from the Flipkart sales, one of the biggest exits by a foreign firm in the country’s e-commerce sector.
Representatives for Tiger Global didn’t immediately respond to requests for comment.
India has become a hotspot for global private equity firms such as Blackstone Inc., KKR & Co. and Warburg Pincus, who have been attracted by the country’s economic growth and its world-beating population. But uncertainty around the tax laws has created a headache for many firms, who sometimes invest through overseas entities that enjoy lower taxes.
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