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The most recent Supreme Court (SC) judgement, widely discussed, is in the case of Tiger Global, in which the court held that while a tax residency certificate is relevant, it is not conclusive where the overall arrangement indicates treaty abuse or lacks commercial substance. The court emphasised that tax treaties are meant to prevent double taxation, not facilitate tax avoidance.
Crucially, the judgement challenges the assumption that pre-2017 investments are automatically insulated from scrutiny and testing under GAAR, particularly where tax authorities allege treaty abuse or a lack of commercial substance. The ruling reinforces the authority of tax officials to examine where control and decision-making sit, whether the holding vehicle has commercial substance, and whether the structure reflects on-the-ground functioning and decision-making realities.
The Delhi Tribunal, in the case of Hareon Solar Singapore Pvt Ltd, giving reference to the Tiger Global ruling, upheld that the taxpayer is not entitled to capital gains exemption under the India–Singapore DTAA (tax treaty), as the Singapore entity lacked commercial substance, operated as a conduit because the control and management was exercised outside Singapore.
The shift in the Indian tax jurisprudence from formal eligibility to substantive legitimacy began with the Supreme Court’s decision in the McDowell & Company Limited case, which laid down the principle of substance over form (Courts should not accept the external form if real substance shows tax avoidance), courts can “lift the corporate veil” (Courts must examine real intent and economic effect) and tax planning allowed but not artificial schemes (Legitimate planning is permissible; avoidance schemes are not), which have been reinstated and refined by later rulings of Azadi Bachao Andolan, Vodafone and the recent Tiger Global ruling and Hareon Solar, and made the shift decisive.
This trend is also visible in the more assertive use of GAAR. In a recent case, a GAAR-approving panel declined to grant tax benefits to a corporate demerger that had received the NCLT approval, concluding that its primary purpose was to obtain tax benefits by sheltering capital gains. The approval of the corporate restructuring did not shield it from GAAR scrutiny.
While the Tiger Global ruling directly addressed treaty abuse, the principles it laid down, particularly the emphasis on substance over form and the primacy of GAAR, make it equally relevant to domestic tax incentives. It would be interesting to see whether this judgement could have implications for IFSC entities that operate with lean or minimal substance. Though the ruling does not dismantle the IFSC framework, it may raise the evidentiary bar for entities operating within the IFSC as well.
In high-profile offshore exits involving Indian operating businesses, tax authorities have sought to test treaty protection in the context of indirect share transfers. The Mumbai tribunal, in the case of eBay Singapore, ruled that the gains arising from the sale of shares of a Singapore company by another Singapore-resident entity were not taxable in India under the India–Singapore tax treaty, notwithstanding that the underlying operating business was located in India. Under the treaty, taxing rights rested exclusively with Singapore. Together, these rulings send a clear signal: where a treaty applies, it must be used as written. India cannot automatically look through offshore share transfers unless the treaty expressly permits it. However, this may now be subject to further scrutiny in light of the Tiger Global ruling, which seems to have challenged the availability of the indirect transfer capital gains exemption under the residual treaty clause.
Interestingly, in another recent Mumbai Tribunal, it was held that the capital gains earned by a Singapore-resident investor from the redemption of Indian mutual fund units were not taxable in India under the India–Singapore tax treaty. The reasoning was straightforward: mutual fund units are not “shares” under the relevant tax treaty, and therefore, fall under the residual clause, which allocates taxing rights to the investor’s country of residence. In the facts of that case, gains of around INR 1.35 crore arising from the redemption of Indian equity and debt mutual fund units were held to be outside India’s taxing rights. Similar reasoning has also been adopted in cases involving the transfer of rights entitlements, which Tribunals have held to be distinct from shares themselves and therefore taxable only in the seller’s country of residence under the residuary clause of the applicable tax treaty.
The GAAR testing for schemes of arrangement has also become widely popular. The Mumbai NCLT, in a recent judgement, approved a merger of a loss-making entity into a profitable group company, rejecting the tax department’s objections. The Tribunal accepted that the transaction was driven by genuine business considerations and held that the tax benefits arising from a bonafide restructuring should not, by itself, imply tax avoidance.
India has always been a principle-based jurisdiction, not a rule-based legal system. Hence, the debate over substance for foreign investors accessing tax treaties with India has been ongoing for almost three decades. The Tiger Global ruling is important, as (i) it appears to deviate from earlier Supreme Court rulings, like the ones in the case of Azadi Bachao and Vodafone cases. Though it explains the deviations and links them to the changes in law and draws a distinction between the income earned pre-2017 and post 2017; and (ii) It marks a roller coaster of changing views and opinions from the AAR to the SC in the case of the same taxpayer bringing some level of discomfort that an interpretation by a court needs SC finality to really be a settled dispute.
To the extent it restarts a debate on the substance of transactions where this appeared settled, namely securities acquired pre-2017, it causes disruption, as sellers and purchasers relied on prior SC pronouncements and sought comfort in the tax positions they adopted. Also, it seemed to put behind a pre-GAAR chapter and move forward into a new tax regime that specifically demanded a focus on anti-avoidance. Aside from this, seen from the lens of the fact that India has been touting the GAAR law since 2012 and formally introduced it in 2017, and also the PPT in treaties is now recognised, the judgement does not materially change the view and approach that currently exists on how to deal with structures from a tax perspective.
This should, therefore, be seen as a ruling that upholds the capacity to investigate the anti-avoidance test across situations and is, therefore, more far-reaching than simply a cross-border sale of shares situation. The question of whether an arrangement has a commercial purpose or is only tax-driven has already been at the centre stage under the GAAR law for the last 10 years; now it appears even more important and potent.
However, the spotlight is now squarely on whether both tax authorities and taxpayers approach tax more maturely, accepting that aggressive structures will be audited and could face litigation scrutiny. Here, the onus lies more on the tax authorities to demonstrate that they would not indiscriminately target all structures.
For investors, this is an opportunity to obtain tax clarity, clean up structures, and consequently demand limited regulatory intervention.
What is clear is that investors must recalibrate risk. While cross-border tax structuring in India remains viable, it now demands far greater discipline. Funds investing through treaty jurisdictions will need to demonstrate genuine substance—through governance, decision-making, and operational presence—rather than relying solely on formal residency. Routine “substance checks” are quickly becoming a baseline requirement.
The broader direction is unmistakable. Courts and tax authorities are moving decisively toward substance-based enforcement. While some recent rulings provide welcome clarity, the overall environment is one of heightened scrutiny. Therefore, foreign investors are likely to seek higher returns, stronger contractual protection, or both, to compensate for increased tax uncertainty at exit.
Deal structuring in India is becoming easier from a regulatory standpoint but riskier from a tax perspective. Reverse flips, fast-track demergers, offshore share transfers, and structured instruments offer speed, flexibility, and capital access, but recent rulings show that tax outcomes hinge on substance over form. Redomiciliations continue to trigger capital gains for foreign shareholders, fast-track restructurings lack tax neutrality, offshore exits remain exposed under deeming provisions, and hybrid instruments face closer scrutiny. The courts are clear: efficient structures are acceptable, but only when backed by a genuine commercial purpose.
Budget 2026 largely maintained continuity in cross-border tax structuring in India. While foreign investors had expected targeted relief—particularly on withholding tax compliance and the scope of deemed income—the Budget delivered only limited procedural simplifications, stopping short of structural reform.
The Budget introduced a small but practical compliance measure by removing the requirement for resident individuals to obtain a Tax Deduction Account Number (TAN) solely to deposit TDS when purchasing immovable property from non-residents. This eases the compliance for high-value real estate transactions involving NRIs.
The Budget also did not address investor concerns around the breadth of deemed income taxation under Section 9(1)(i). Despite repeated representations, there were no carve-outs for genuine foreign-to-foreign share transfers, including listed share transactions or bonafide M&As. As a result, even transparent, market-driven exits remain exposed to indirect transfer taxation arguments.
While a new consolidated Income-tax Act is proposed from FY 2026–27 to improve clarity and reduce litigation, the Budget introduced a consolidated Income-tax Act (effective FY 2026–27), which includes more restrictive conditions on loss carry-forwards in specific reorganisation scenarios. Tax neutrality for demergers continues to hinge on the NCLT approval under the existing framework, with fast-track restructurings remaining outside the tax-neutral regime, limiting their practical utility.
Overall, Budget 2026 does little to alter the calculus for foreign investor tax risk. The shift back to taxing share buybacks in shareholders' hands as capital gains, rather than at the company level, does little to address broader concerns about exit taxation, indirect transfers, or buyer-side withholding exposure.
There was no extension of grandfathering protections, no clarification on indirect share disposals, and no legislative response to recent judicial developments, including the SC’s Tiger Global ruling. Despite increasing GAAR scrutiny of restructurings, the Budget also offered no protection for transactions already approved or underway.
Budget 2026 delivers incremental compliance relief but avoids the most complex cross-border tax issues. Expectations around reducing withholding burdens, narrowing deemed income provisions, excluding listed share transactions, and providing buyer protection mechanisms remain unfulfilled. For now, investors must operate in an environment of selective clarity and continued uncertainty—relying on treaty protection where clearly available, while planning defensively for anti-avoidance challenges.
