Foreign Investors Urge Government To Clarify Tax Treatment Of Grandfathered Shares

New Delhi, Oct 19 (KNN) International investors have urged the government to address concerns over the use of the judicial anti-avoidance rule (JAAR) by tax authorities to deny treaty benefits on the sale of certain grandfathered shares.

The issue has raised concerns among foreign direct investors, including multinational corporations, private equity firms and venture capital funds, over the tax treatment of investments acquired before April 1, 2017.

JAAR was reportedly invoked to reject tax benefits claimed by at least three Mauritius-based investors on the sale of such shares, reported The Economic Times.

Under the amended India-Mauritius tax treaty, gains from the sale of grandfathered shares are exempt from capital gains tax. In March, the Central Board of Direct Taxes (CBDT) had also clarified that such gains would not be affected by the General Anti-Avoidance Rules (GAAR).

Investors Flag Overlap Between GAAR And JAAR

Investors have argued that both GAAR and JAAR are anti-avoidance measures intended to prevent the use of artificial structures to obtain tax benefits. 

They contend that invoking JAAR after protection was extended against GAAR for grandfathered shares undermines the government's stated tax position.

The Asia Securities Industry and Financial Markets Association (ASIFMA) has raised the issue as part of its engagement with regulators and policymakers.

However, tax officials believe that addressing the issue may require a legislative amendment rather than a CBDT circular, as an executive clarification could face legal challenges.

Supreme Court Ruling Adds Complexity

The debate follows a January 2026 Supreme Court ruling in the case involving US investment firm Tiger Global. The court held that tax authorities could invoke GAAR and JAAR either independently or together.

Tax professionals have cautioned that extending protection against JAAR through an executive decision could conflict with the ruling. GAAR is a codified provision that applies when tax benefits exceed Rs 3 crore, while JAAR is based on judicial precedents.

The issue centres on how tax authorities should balance the protection available to investors under treaty provisions with their power to deny benefits where investment structures are considered to lack genuine commercial substance.

(KNN Bureau)