India: the tax it imposed, lost, and repealed

India tried to tax two foreign companies by changing the law backwards in time. It lost both cases in international arbitration, was ordered to pay over a billion dollars to one of them, and repealed the law. The story of India's tax gap is the story of a state learning, expensively, how much leverage large cross-border investors actually have.

The gap, made public: a telecoms group and an energy group

In 2007 the Dutch subsidiary of a multinational telecoms group bought an Indian mobile-network operator for about $11.2bn by purchasing the shares of a Cayman Islands holding company. India's tax authority argued the buyer should have withheld tax on capital gains it said had accrued in India from the indirect transfer of Indian assets, and raised a demand of around 110bn rupees, about $2bn at the time. On 20 January 2012 the Supreme Court of India ruled unanimously for the telecoms group: the offshore share transfer did not give rise to Indian taxable gains and there was no withholding obligation.

The government's response was to change the law retrospectively. The Finance Act 2012 inserted Explanation 5 to Section 9(1)(i) of the Income Tax Act, taxing indirect transfers of foreign company shares deriving substantial value from Indian assets, with effect running back to 1962. It restored the telecoms demand, with interest and penalties, and caught a British energy group too. That group had restructured its Indian operations in 2006 to 2007 ahead of an IPO; the same retrospective amendment was applied to raise a liability of about $1.6bn, and Indian tax authorities seized the group's shares and dividends.

Both companies went to international arbitration under bilateral investment treaties, and both won. The telecoms tribunal ruled on 25 September 2020 that the retrospective tax breached the treaty's fair-and-equitable-treatment standard and ordered India to cease the conduct, plus £4.3m in costs. The energy-group tribunal ruled on 21 December 2020 (PCA Case No. 2016-07) that India had breached the India-UK treaty and ordered it to pay USD 1,232,820,143 in compensation plus around $22.4m in costs; the group obtained the right in France to seize Indian government properties to enforce it.

Facing both losses, and with at least seventeen companies similarly embroiled, India introduced the Taxation Laws (Amendment) Bill on 5 August 2021 and enacted it that month. It provided that no future demand would be raised under the 2012 retrospective amendment, nullified pending assessments for pre-28 May 2012 transfers, and refunded tax already collected (without interest), on condition that companies withdrew all litigation, arbitration and treaty claims. Both groups settled on those terms. India did not delete the retrospective provision, but it hardwired a non-application framework around it.

The Indian answer: GAAR and the 2026 Supreme Court treaty ruling

India's General Anti-Avoidance Rules came into force on 1 April 2017 (Chapter X-A of the Income Tax Act). They apply to an "impermissible avoidance arrangement," where the main purpose is a tax benefit and at least one of four taintedness tests is met (not at arm's length, misuse or abuse of the Act, lacking commercial substance, or carried out in a way not ordinarily employed for bona fide purposes). The rule applies only where the aggregate tax benefit exceeds 30m rupees a year, and investments made before 1 April 2017 are grandfathered. (The original grandfathering cut-off referenced in the rules was 30 August 2010, later moved to 1 April 2017.)

The boundary between GAAR and the treaty system has just been redrawn. In a Supreme Court ruling of 15 January 2026 in a matter brought by an investment group, the court confirmed that GAAR can apply to deny a treaty benefit where a benefit arises on or after 1 April 2017, even if the underlying investment predates it. That sharpens India's central tool considerably: a grandfathered investment no longer guarantees a grandfathered outcome.

The Mauritius route and the equalisation levy

For decades the main route into India ran through Mauritius. The India-Mauritius treaty, in force since 1983, taxed capital gains on Indian shares only in Mauritius, which levied no capital gains tax, creating a zero-tax channel that was heavily used through shell companies with minimal substance. The India-Singapore treaty mirrored it. India renegotiated. A protocol signed on 10 May 2016 grandfathered shares acquired before 1 April 2017, taxed those acquired between 1 April 2017 and 31 March 2019 at half the domestic rate (subject to a limitation-of-benefits test excluding shell companies), and applied full domestic rates from 1 April 2019. The linked Singapore benefit fell away accordingly.

India also tried a unilateral digital tax. The equalisation levy charged 6% on payments to non-resident online advertising providers from June 2016, and 2% on non-resident e-commerce operators from April 2020. Both have since been withdrawn: the 2% levy from 1 August 2024 and the 6% advertising levy from 1 April 2025, presented partly as a step toward Pillar Two alignment and partly as a concession in US-India trade relations. As with Canada's digital-services tax, the unilateral measure aimed at large foreign digital companies was the one that got given up.

On the global minimum tax, India has signed the OECD framework but has not enacted domestic Pillar Two legislation as of mid-2026. It has gone as far as requiring companies to disclose their Pillar Two exposure in their accounts (an amendment to Ind-AS 12, effective 1 April 2025), which is preparation, not enactment. The OECD's January 2026 side-by-side package is understood to increase the pressure on India to enact a domestic minimum tax to keep taxing rights over Indian-sourced profits.

What India loses

India loses about $21.4bn a year ($21,375.8m) to cross-border corporate tax abuse, from the State of Tax Justice 2024 (data year 2021). For a developing economy that revenue is heavily relied upon for public spending, which is part of why India has been among the more assertive jurisdictions in the contest, willing to use retrospective law, treaty renegotiation and a freshly sharpened GAAR even after losing in arbitration.

What an Indian small business can legitimately do

India must use FY2025-26 figures, and the picture for a small company is straightforward. A domestic company can elect Section 115BAA for a flat effective rate of 25.17% (a 22% base rate with a 10% surcharge and 4% cess). The Section 115BAB regime for new manufacturers, a 15% base rate worth about 17.16% after surcharge and cess, closed to new entrants when its commencement window expired on 31 March 2024 and was not extended; companies that already qualified keep it. A minimum alternate tax on book profits applies to companies not opting into those concessional regimes; the Finance Act 2026 cut its rate from 15% to 14% and made it a final tax from FY2026-27, with no new MAT credit accruing after 1 April 2026. For the smallest traders and professionals, the presumptive schemes (Sections 44AD and 44ADA) tax a deemed fraction of turnover and remove most bookkeeping, and DPIIT-recognised startups can claim a full profit deduction for three years under Section 80-IAC. On the personal side, the FY2025-26 new-regime slabs run from nil up to 4 lakh through to 30% above 24 lakh, and the Section 87A rebate (raised to 60,000 rupees) means nil tax up to 12 lakh of income. None of this is the Mauritius route. The small Indian business pays its 25.17% or files under a presumptive scheme; the cross-border investor argued over whether it owed anything at all, and frequently won.