Dear Readers,
I hope you are in good health and high spirits!
This article highlights a significant shift in India’s tax enforcement landscape. As reported by CNBC-TV18, the Income Tax Department is intensifying its scrutiny of foreign investments routed through jurisdictions like Mauritius, Singapore, and Cyprus. While Tax Residency Certificates (TRCs) were once considered sufficient to claim treaty benefits, authorities now demand proof of economic substance, control, and beneficial ownership.
Driven by frameworks such as the General Anti-Avoidance Rules (GAAR) and the Multilateral Instrument (MLI), this move aims to curb treaty abuse and promote transparency. However, it also introduces greater complexity and uncertainty for foreign investors, especially those using Intermediate Holding Companies (IHCs).
This article covers the implications of this regulatory shift and how it may affect cross-border investment structures and treaty eligibility.
Best Regards,
Samir Mahajan
India Cracks Down on Treaty Shopping: Tax Authorities Demand Proof of Substance, Ownership, and Control from Foreign Investors Using Low-Tax Jurisdictions Like Mauritius and Singapore. Source: CNBC-TV 18
In a significant development aimed at curbing tax treaty abuse, the Indian Income Tax Department has reportedly issued detailed notices to several non-resident individuals and foreign entities, particularly those based in jurisdictions such as Singapore, Mauritius, and Cyprus. According to a CNBC-TV18 report, the crackdown focuses on the practice of “treaty shopping,” where foreign investors use Tax Residency Certificates (TRCs) from low-tax jurisdictions to improperly claim benefits under India’s Double Taxation Avoidance Agreements (DTAAs).
The Income Tax Department is believed to be moving away from treating TRCs as sufficient proof of eligibility for treaty benefits. Sources familiar with the matter state that authorities are now demanding evidence of the commercial rationale, economic substance, and decision-making authority behind the entities used to route investments into India. The scrutiny has zeroed in on Intermediate Holding Companies (IHCs) established in favorable tax jurisdictions. Many of these companies are suspected to be shell or conduit entities, lacking genuine business operations and created primarily to exploit lower withholding tax rates.
The notices reportedly include probing questions about the ultimate beneficial owners of Indian investments, the purpose of setting up the IHC in a tax haven, the identity of key decision-makers, the number of local employees, and the actual nature of business activities conducted. This heightened scrutiny is part of a broader tax enforcement strategy that includes the implementation of General Anti-Avoidance Rules (GAAR) and the Multilateral Instrument (MLI), which introduced the Principal Purpose Test (PPT). Under this test, treaty benefits can be denied if the principal objective of an arrangement is found to be tax avoidance.
This marks a clear departure from India’s earlier approach, where courts, including the Supreme Court, had upheld TRCs as prima facie evidence for availing treaty benefits. However, the tax authorities now argue that real control, substance, and beneficial ownership must be evaluated beyond formal documentation. This change has triggered a wave of litigation, as many investors and foreign companies challenge the notices by asserting that their investment structures have legitimate commercial objectives and are compliant with Indian and international legal norms.
Judicial perspectives on the issue are also evolving. While Indian courts have historically favored taxpayers in such matters, more recent judgments reflect a nuanced approach. The Delhi High Court, for example, has previously ruled that merely routing investments through Mauritius does not automatically imply tax evasion, particularly given the long-standing treaty and geographical proximity. Nonetheless, the incorporation of GAAR and PPT means foreign investors must now be far more diligent in establishing the commercial substance of their offshore structures.
India, with over 94 comprehensive tax treaties, continues to be a key investment destination. However, the recent crackdown sends a strong message that the era of form-over-substance tax planning may be coming to an end. For international investors, this development underscores the importance of reassessing existing structures and ensuring they meet the rising standards of transparency, control, and economic substance expected by Indian tax authorities.
Going forward, it is essential for the Government to strike a delicate balance between curbing treaty abuse and promoting a stable investment climate. While regulatory vigilance is justified, it must be complemented with well-defined and predictable guidelines that enable foreign investors to operate with clarity and confidence. Encouraging legitimate investment structures, while deterring abusive practices through transparency and consistency, will help safeguard India’s credibility as a fair and attractive global investment destination.
