13/12/21

INDIA: Lens on investments via tax havens worries PEs.

As published on economictimes.indiatimes.com, Monday 13 December, 2021.

Some of the largest private equity funds have reached out to their tax advisors to examine if investments made through tax havens such as Singapore, Cyprus and Mauritius, could come under the scanner after revenue authorities raised concerns over grandfathering clauses. They are also worried the tax department could trigger judicial GAAR (General Anti-Avoidance Rule) after it reopened assessments of many top PE firms over capital gains tax.

Many PEs under the taxman's lens fear the investigation could result in tax complications. Some firms are looking to reach out to the government, people close to the development said.

Firms including Blackstone, KKR, TPG, and Carlyle have tapped their tax advisors after the I-T department demanded tax over investments made through tax havens during 2013-16, people aware of the development told ET.

Blackstone, KKR, TPG, and Carlyle did not respond to ET's questionnaire.

Many fear the tax department could start questioning other transactions in the coming weeks. As of now, no foreign portfolio investor has been questioned by the tax department in this regard.

"Many investments were made in India through Singapore, Mauritius and Cyprus entities that merely existed on paper... where it appears these entities in tax havens were formed merely to lower tax outgo in India," a person with direct knowledge of the matter said. India amended double tax avoidance agreements or tax treaties with Cyprus and Mauritius in 2016, and with Singapore in 2017.

The government had said any investment made prior to the amendment would get grandfathering benefits - taxed in accordance with the old tax treaty.

Many PE firms are now asking if reopening investigation is tantamount to rejecting grandfathering benefit.

Tax experts say the question really is whether grandfathering benefits come into play at all, especially if the government triggers GAAR. "Grandfathering benefits were extended to investors routing investments through Mauritius or Singapore. However, based on the GAAR circular, the CBDT (Central Board of Direct Taxes) earlier clarified that if a choice of jurisdiction is based upon a non-tax commercial consideration, then GAAR cannot be invoked," Amit Singhania, a partner at law firm Shardul Amarchand Mangaldas, said.

Many tax experts have questioned whether unilateral domestic tax laws such as GAAR can supersede international tax regulation and mutually agreed on tax treaties.