In a significant move aimed at curbing tax treaty abuse, the Indian Income Tax Department is believed to have sent detailed notices to several non-resident individuals and foreign entities, especially those based in Singapore, Mauritius, Cyprus, and other known tax havens, sources in the know of the development told CNBC-TV18.The department has flagged concerns over “treaty shopping”—wherein entities are allegedly using Tax Residency Certificates (TRCs) from low-tax jurisdictions to illegitimately claim benefits under India’s Double Taxation Avoidance Agreements (DTAAs), according to the sources.”The department believes that mere possession of a Tax Residency Certificates is no longer sufficient,” a source directly familiar with the development said. “They want foreign investors to substantiate the commercial rationale, economic substance, and decision-making authority of the entities used to route investments into India.”
Shell structures under lensThe scrutiny is particularly intense on Intermediate Holding Companies (IHCs) set up in jurisdictions like Mauritius and Singapore. The tax authorities suspect that many of these entities may be shell or conduit companies, lacking genuine business activity and created primarily to benefit from lower withholding tax rates.Read more: Income tax return filing deadline extended to September 15″Questions raised in the notices include: Who are the real beneficiaries of the Indian investments? What’s the rationale for setting up the IHC in a tax haven? Who makes the key decisions? How many employees are on the ground? What’s the nature of their business activity?” said a second person aware of the matter.These notices are part of a broader strategy to enforce anti-abuse provisions, especially following the implementation of the Multilateral Instrument (MLI) and General Anti-Avoidance Rules (GAAR). Under these frameworks, the Principal Purpose Test (PPT) has been introduced, allowing authorities to deny treaty benefits if obtaining such benefit was the main purpose of the arrangement.Tax residency certificates no longer ‘sacrosanct’?
This marks a major shift from earlier positions. Historically, Indian courts—including the Supreme Court—have upheld the Tax Residency Certificate (TRC) as prima facie evidence for claiming treaty benefits. But the department now argues that control, substance, and beneficial ownership must also be evaluated.”This aggressive interpretation has already sparked a wave of litigation,” a legal expert told CNBC-TV18, who is dealing with one such matter and did not wish to be named due to client confidentiality. “Investors and foreign companies are challenging these notices, asserting that their structures have commercial merit and are in compliance with Indian law and international norms.”Read more: Retirement tax benefits explained: I-T dept issues new guide for senior citizensJudiciary pushback and investor uncertaintyWhile courts have generally sided with taxpayers in the past, upholding TRCs in the absence of clear evidence of abuse, recent judgments have started to reflect a more nuanced approach. For instance, the Delhi High Court has previously observed that merely routing investments through Mauritius does not automatically imply illegality, especially given its favorable treaty terms and proximity to India.However, the evolving jurisprudence—coupled with GAAR and PPT—means that foreign investors must now be more careful in justifying the commercial substance of their investment vehicles.Call for clear guidelines Experts are calling on the Income Tax Department to issue clear guidance on what qualifies as adequate “substance” in such cases.“Having an IHC is a widely accepted business structure globally,” said one international tax advisor. “The government must distinguish between genuine investment structures and abusive ones. Without clear rules, this will only lead to uncertainty and reduced investor confidence.”With over 94 comprehensive tax treaties, India remains a key investment destination. However, this crackdown indicates that the era of form-over-substance tax planning is coming to an end.
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