Foreign Institutional Investors have been granted specific carve-outs from GAAR, recognising their unique position in India's capital markets and the regulatory framework governing their operations. Understanding these carve-outs is essential for FIIs and their advisors.
The Statutory Framework
Rule 128 Exemption
Rule 128 excludes certain arrangements from GAAR, including cases where the aggregate tax benefit to all parties does not exceed ₹3 crore . It also exempts qualifying Foreign Institutional Investors that comply with specified conditions, and non-residents investing in FIIs through offshore derivative instruments .
Grandfathering for Pre-2017 Investments
Investments made before 1 April 2017 are grandfathered and not covered by GAAR . The CBDT has clarified that GAAR will not apply to income arising from the transfer of assets acquired before 1 April 2017 , providing significant relief to legacy investors .
FII Carve-Out Conditions
Qualifying FIIs
To qualify for the GAAR carve-out, FIIs must:
- Comply with specified conditions
- Be registered with SEBI
- Operate within the regulatory framework
- Maintain proper documentation
Offshore Derivative Instruments
Non-residents investing in FIIs through offshore derivative instruments are also exempt, provided the conditions are satisfied.
The Tiger Global Context
The Supreme Court Ruling
The Supreme Court affirmed that foreign investors cannot rely solely on tax residency certificates to claim treaty benefits where GAAR scrutiny is attracted . The Court upheld that capital gains arising from Tiger Global's exit from Flipkart in 2018 were taxable in India .
Treaty Override
GAAR overrides tax treaties . Even where a treaty provides exemption, benefits may be denied if GAAR applies. Tax authorities may deny treaty benefits under GAAR even when investors hold valid Tax Residency Certificates .
Legacy Investment Relief
The government has moved to decisively remove uncertainty around GAAR application on foreign investor exits, offering significant relief to private equity, venture capital, and sovereign wealth funds with legacy India investments .
Practical Implications for FIIs
Documentation Requirements
FIIs should maintain:
- Registration documents
- Compliance records
- Investment documentation
- Tax residency certificates
Structuring Considerations
FIIs should:
- Ensure compliance with SEBI regulations
- Maintain proper documentation
- Consider the impact of the carve-out conditions
- Monitor developments in GAAR jurisprudence
Expert Legal Guidance
Understanding the FII carve-out is essential for foreign investors. Anuj Desai & Associates provides expert advisory services on GAAR compliance, helping FIIs navigate the exemption conditions and protect their tax positions.