Foreign investors are actively restructuring their offshore investment vehicles to align with evolving Indian tax regulations and to ensure tax optimization. These adjustments come in response to increased scrutiny from Indian tax authorities and recent judicial pronouncements that have challenged the previously assumed benefits of using offshore structures, particularly those based in Mauritius and Singapore.
The primary driver for this restructuring is the Indian government's increasing focus on curbing tax avoidance and ensuring that offshore entities have genuine economic substance. The Supreme Court's decision in the Tiger Global-Flipkart case on January 15, 2026, has significantly impacted the landscape, clarifying that the General Anti-Avoidance Rules (GAAR) can be applied to arrangements where a tax benefit is claimed after April 1, 2017, irrespective of the investment's cut-off date or the structure's longevity, if it lacks commercial substance. This ruling has far-reaching implications for private equity funds, hedge funds, and Foreign Portfolio Investors (FPIs) that have historically used Mauritius and Singapore-based structures.
Under Section 112A of the Income-tax Act, long-term capital gains (LTCG) on listed equity shares are taxable in India at a concessional rate, which was raised to 12.5 percent on gains above a certain threshold from July 23, 2024. This means offshore investors can no longer assume automatic exemptions at exit. Withholding taxes and thorough substance checks are now integral aspects of the investment process.
The restructuring efforts involve several strategies. Some investors are unwinding complex offshore structures and consolidating their investments into entities with demonstrable business operations and management in the same jurisdiction. Others are opting to invest directly into India through domestically incorporated entities, thereby subjecting themselves to Indian tax laws but also gaining access to certain exemptions and benefits.
Furthermore, investors are re-evaluating their exit strategies, factoring in the potential impact of Indian taxes on capital gains when pricing and negotiating deals. This is particularly relevant in late-stage valuations and secondary sales, where the risk of not obtaining treaty relief due to a lack of economic substance can significantly affect the overall purchase price and net proceeds. Investors who previously relied on treaty exemptions for offshore share transfers routed through Mauritius or similar jurisdictions are now adjusting their models to account for potential Indian capital gains tax, interest, and penalties.
To enhance transparency and prevent potential stock manipulation, the Securities and Exchange Board of India (SEBI) is also tightening regulations for "high-risk" foreign investors. These regulations require foreign investors holding a significant portion of their Indian assets under management in a single company or corporate group to disclose the identities of individuals controlling or profiting from the investment vehicle.
The Indian government aims to modernize the tax environment through digitization of tax compliance and administration. The Finance Minister announced that a new tax code will be unveiled in six months to make the tax code concise, clear, and easy to understand.
These changes collectively signal a move towards a more rigorous and transparent tax regime in India, requiring foreign investors to adopt more robust and compliant investment structures. By adhering to these regulations, strategically managing capital gains and losses, and leveraging available exemptions, foreign investors can optimize their investment outcomes in the evolving Indian tax landscape.
