Mauritian Authorities Scrutinize Legacy Fund Structures
At least five global private equity and venture capital firms based in Mauritius, which hold legacy investments in India, have received detailed queries from the Mauritian government. According to sources cited by Moneycontrol, the inquiries seek specific information, including minutes of board meetings and the residency status of board members and other designated personnel.
These queries are not initiated independently by Mauritius but arise from requests made by the Indian income-tax department. The Indian authorities utilized the information sharing pact between India and Mauritius to obtain these details, a route taken after funds previously declined to provide such information directly to Indian tax officials, citing confidentiality clauses and jurisdictional issues.
Focus on Commercial Substance and Control
The core of the Mauritian government's inquiries revolves around the operational reality of these funds. The queries examine the extent to which daily operations are conducted in Mauritius and the level of control exerted by parent funds, typically located in the US or Europe.
One source explained that the Indian tax department is seeking to understand the functional aspects of these entities, specifically the role played by each layer above the Mauritius-based fund. This scrutiny is particularly relevant for investments made prior to April 1, 2017, when the Double Tax Avoidance Agreement (DTAA) between the two nations was amended to remove capital gains tax exemptions.
Context of the Tiger Global Verdict
This regulatory attention comes in the aftermath of a landmark Supreme Court of India judgment delivered on January 15. In that case, the court ruled against Tiger Global regarding its 2018 sale of Flipkart shares to Walmart. The court held that a Tax Residency Certificate (TRC) alone is insufficient to claim capital gains tax exemption under the India-Mauritius tax treaty if the entity lacks genuine commercial substance.
The Supreme Court determined that the Mauritius entities used by Tiger Global were mere conduit structures controlled from the US. Consequently, Indian authorities applied General Anti-Avoidance Rules (GAAR) to tax the sale of these shares.
Implications for Legacy Investments
Sources indicate that the current queries appear to be an exercise by the tax department to understand how legacy fund structures are functioning post-verdict. While the exact motive remains unclear, the scrutiny may be aimed at ascertaining whether funds continuing to operate from Mauritius possess the requisite commercial substance.
Notably, these funds have not undertaken any recent sales of shares. Generally, the question of eligibility for capital gains tax exemption arises only upon the sale of assets. However, the proactive nature of these queries suggests a broader review of compliance and substance for pre-2017 investments.
Emails sent to the finance ministries of both Mauritius and India remained unanswered at the time of publication.