Overview: Foreign investors have raised concerns with the Central Board of Direct Taxes (CBDT) over the use of the judicial anti-avoidance rule (JAAR) to challenge tax treaty benefits on grandfathered shares. The dispute follows March 2026 amendments protecting qualifying transfers of pre-April 2017 investments from the General Anti-Avoidance Rules (GAAR). The Supreme Court’s Tiger Global judgment has added to uncertainty over whether JAAR can be invoked separately.
India has amended its GAAR rules to protect qualifying transfers of investments made before 1st April, 2017. Yet foreign investors remain concerned that tax authorities could still deny treaty benefits by invoking judicial anti-avoidance principles. The dispute, brought into focus by the Supreme Court’s Tiger Global judgment, raises a crucial question about the limits of grandfathering protection.
The dispute matters to foreign funds and multinational businesses holding Indian investments through overseas entities. Although CBDT has clarified the GAAR protection available for qualifying transfers, investors are questioning whether tax authorities can still use judicial anti-avoidance principles to deny treaty relief when older investments are sold.
Why Are Foreign Investors Challenging JAAR?
Investors represented by the Asia Securities Industry & Financial Markets Association (ASIFMA) had raised concerns with CBDT officials, states a report The Economic Times, adding that JAAR had been used to reject benefits claimed by at least three Mauritius-based investors selling grandfathered shares.
Under the India-Mauritius tax treaty, qualifying shares acquired before 1st April, 2017, may benefit from grandfathering provisions for capital gains. However, the availability of treaty relief can depend on the investor’s eligibility and the facts of the arrangement.
On 31st March, 2026, Central Board of Direct Taxes (CBDT) amended Rule 10U of the Income-tax Rules, 1962. A corresponding notice made changes to Rule 128 of the Income-tax Rules, 2026, under the Income-tax Act, 2025, effective from 1st April, 2026. The amendments clarify that GAAR does not apply to income arising from the transfer of investments made by the relevant person before 1st April, 2017.
The amendments address GAAR, the statutory anti-avoidance framework. They do not expressly rule out the independent application of JAAR. Investors are seeking clarity on this distinction, while the government faces the question of whether further protection would require a change in law.
What Does the Tiger Global Judgment Mean?
In its judgment, dated 15th January, 2026, the Supreme Court ruled against three Mauritius-based Tiger Global entities seeking treaty benefits on gains from the sale of their stake in Flipkart. The Court found that the investment structure was an impermissible tax-avoidance arrangement and denied the claimed treaty relief.
The Revenue had relied on GAAR and, alternatively, JAAR. The judgment recognised that tax authorities could invoke the two separately or together. This has complicated the question of whether the subsequent GAAR amendments also prevent a separate JAAR-based challenge.
The ruling does not mean that every pre-April 2017 investment automatically loses grandfathering protection. Its implications for other investors depend on the applicable treaty provisions, the investor’s circumstances and the facts of the holding structure.
What Should Foreign Investors Review?
Foreign investors should review their position before selling or restructuring Indian investments held through overseas entities.
- Verify eligibility: Check acquisition dates, relevant treaty provisions and the conditions for claiming grandfathering.
- Maintain records: Keep shareholding documents, investment agreements, board resolutions, relevant approvals and tax residency documents where applicable.
- Review the holding structure: Ensure corporate records accurately reflect ownership, governance and decision-making. Investors should be able to explain the commercial purpose of their structure.
- Obtain specialist tax advice: Assess treaty entitlement and potential anti-avoidance challenges before completing a significant exit or restructuring.
These steps support sound documentation but do not guarantee treaty relief or prevent a tax challenge.
Setindiabiz Support
Foreign businesses establishing or maintaining Indian operations need suitable entities, accurate corporate records and timely regulatory compliance. Setindiabiz supports overseas businesses through India Entry Services, including Indian subsidiary and joint venture formation, branch or liaison office setup, applicable FEMA/RBI compliance and corporate documentation.
Maintaining accurate incorporation records, ownership documents and statutory filings is an important part of corporate compliance. These records should reflect the actual ownership and operating arrangements as the business evolves.
Corporate compliance alone, however, does not establish treaty eligibility or resolve a JAAR dispute. Investors facing grandfathering questions should obtain specialist international tax advice alongside their corporate and regulatory compliance support.
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FAQs
JAAR refers to judicial anti-avoidance principles used to examine arrangements that may be designed to obtain tax benefits improperly. Its application depends on the relevant legal principles and the facts of the case.
No. Grandfathering depends on the applicable treaty provisions and eligibility conditions. The acquisition date alone does not guarantee treaty relief.
GAAR is a statutory anti-avoidance framework. JAAR refers to judicial anti-avoidance principles developed through case law. Their legal foundations differ, although both may be relevant when tax authorities examine an arrangement.
The JAAR dispute highlights uncertainty for foreign investors planning exits from older Indian investments. The March 2026 amendments clarified the protection available under GAAR, but the separate question of JAAR remains contentious. Investors should review their treaty position, holding structure and records rather than assume that grandfathering alone settles the tax outcome.
