Published on: 25 January, 2026 17:28 IST
In the labyrinthine world of international taxation, India has long been a magnet for foreign investment, thanks to its booming economy and strategic tax treaties. But recent judicial rulings and policy shifts are reshaping the landscape, sending ripples through multinational corporations (MNCs) and prompting a reevaluation of cross-border strategies.
From retrospective tax demands worth billions to the dismantling of favorable clauses in bilateral agreements, the story of India’s tax evolution is one of tightening controls, anti-avoidance measures, and a push for fiscal sovereignty. At the heart of this saga is a 2023 Supreme Court (SC) ruling that upended the automatic application of the Most Favoured Nation (MFN) clause, potentially triggering ₹11,000 crore in retro tax liabilities for MNCs.
Fast-forward to 2026, and fresh developments—including a landmark SC judgment on General Anti-Avoidance Rules (GAAR) versus Double Taxation Avoidance Agreements (DTAA)—are adding new layers of complexity. Let’s unpack this intricate tale, weaving in the major facts from recent reports and exploring what it means for global businesses eyeing India’s markets.
The 2023 Bombshell: SC Ruling on MFN Clause Sparks Retro Tax Fears
The drama began in earnest on October 19, 2023, when the Supreme Court delivered a pivotal judgment clarifying the invocation of the MFN clause in India’s tax treaties. This clause, embedded in DTAAs with countries like the Netherlands, Switzerland, and France, was designed to ensure that if India granted more favorable tax terms to a third OECD member country, those benefits would automatically extend to the treaty partner. However, the SC ruled that such benefits are not self-executing—they require an explicit notification from the Indian government under Section 90 of the Income Tax Act. Without this, taxpayers cannot unilaterally claim lower rates.
The implications were immediate and staggering. MNCs headquartered in the Netherlands, Switzerland, and France—key hubs for routing investments into India—faced potential fresh demands on repatriated dividends. According to tax authorities, these companies had been misusing the MFN clause to avail a reduced 5% withholding tax on dividend income, instead of the standard 10% or higher rates. The ruling stemmed from a batch of appeals where foreign entities argued for automatic MFN application based on India’s treaties with later OECD joiners like Slovenia or Lithuania, which offered lower rates on dividends, royalties, and technical fees.
Key facts from the Economic Times report highlight the scale:
- Retro Tax Demands: Tax authorities estimated that MNCs could face retrospective claims totaling around ₹11,000 crore on dividend income from previous years.
- Annual Revenue Loss: Officials claimed India was losing approximately ₹3,000 crore annually due to lower taxes paid by invoking the MFN clause.
- Affected Sectors: The ruling impacts withholding tax on royalties and fees for technical services, with tax authorities assessing the broader fallout on dividend repatriation.
- OECD Misuse: A large number of companies were accused of exploiting the OECD’s Most Favoured Nation status without proper bilateral notifications, leading to demands for back payments.
This wasn’t just a legal technicality; it signaled India’s intent to plug revenue leaks amid growing scrutiny of treaty shopping. The Economic Times noted that tax notices for lower payments in prior years were imminent, with one official stating, “We were awaiting the Supreme Court order so there will be a review of tax positions in many cases.” Even conservative estimates pegged the annual hit to India’s coffers at ₹3,000 crore, underscoring the ruling’s fiscal significance.
In the wake of the verdict, experts warned of a chilling effect on foreign direct investment (FDI). MNCs that had structured their India operations around MFN benefits suddenly found themselves exposed to higher liabilities, prompting urgent reviews of past filings and potential appeals. The decision also aligned with global trends under the OECD’s Base Erosion and Profit Shifting (BEPS) framework, emphasizing substance over form in tax planning.
2024-2025: Enforcement Ramps Up Amid Global Backlash
The years following the 2023 ruling saw intensified enforcement. Tax authorities issued notices to numerous MNCs, demanding reassessments of dividend payouts from as far back as 2010. For instance, French and Swiss firms with significant stakes in Indian subsidiaries faced audits, with some reporting provisions for potential liabilities in their financial statements. This period also witnessed diplomatic murmurs, as affected countries lobbied for clarifications, but India held firm, prioritizing domestic revenue needs.
Broader taxation updates during this time included extensions for start-up tax holidays. The Finance Act 2025 pushed the incorporation deadline for eligible start-ups claiming deductions under Section 80-IAC from April 1, 2025, to April 1, 2030, aiming to boost innovation amid economic recovery. Additionally, the new Data Protection Law (Digital Personal Data Protection Act, 2023) put banks in a bind, as highlighted in reports: High-street lenders, hoarding vast customer data, are grappling with compliance, with potential tax implications for data-driven financial services.
January 2026: A Fresh SC Twist in the Tiger Global Case Rattles the Mauritius Route
Just as the dust seemed to settle, the Supreme Court dropped another bombshell on January 15, 2026, in the case of Authority for Advance Rulings (Income Tax) and Others v. Tiger Global International II Holdings. This ruling, arising from a dispute over capital gains on indirect share transfers via Mauritius, has reignited debates on retrospective taxation and treaty protections.
At its core, the judgment addresses the interplay between GAAR (introduced in 2012 but effective from 2017) and DTAAs. The SC upheld the Advance Ruling Authority’s (AAR) decision, setting aside a Delhi High Court order from August 2024. Key holdings:
- GAAR Overrides DTAA in Avoidance Cases: GAAR can trump DTAA benefits if an arrangement lacks commercial substance and is primarily for tax avoidance. While grandfathering protects pre-2017 investments, benefits arising post-2017 (e.g., from share sales) may still be scrutinized.
- MFN and Treaty Shopping: The court cautioned against MFN clauses, noting they could erode India’s tax sovereignty by forcing extensions of benefits without reciprocity. In the Indo-Mauritius DTAA (amended in 2016), the absence of a strong Limitation of Benefits (LOB) clause was highlighted, but post-2017 protocols now bar shell companies from claims.
- Retrospective Amendments: The ruling references the Finance Act 2012’s retrospective clarifications on indirect transfers (taxing foreign shares deriving value from Indian assets back to 1962), but stresses they apply only where abuse is proven. No blanket retro demands, but Revenue can invoke GAAR for post-2017 gains on pre-2017 structures.
- Implications for MNCs: Investors routing through Mauritius must prove genuine residency and substance (e.g., operations expenditure over ₹2.7 million annually). The decision rattles the “Mauritius Route,” which accounts for 42% of FDI, and could lead to fresh demands in cases like Volkswagen’s $1.4 billion back-tax challenge.
This verdict reverses prior investor-friendly precedents, emphasizing a “look at” test for holistic scrutiny of arrangements. Global investors are rattled, with reports of shockwaves through private equity circles.
Treaty Overhauls and Budget 2026 Outlook: A New Era?
Adding to the momentum, India and France recently revamped their DTAA, slashing dividend withholding tax to 5% for substantial holdings (over 10% equity) while axing the MFN clause entirely. This move, aimed at curbing automatic benefit extensions, signals India’s broader strategy to renegotiate treaties for equity.
Looking ahead, the Budget 2026 outlook calls for rethinking tax policies to match modern wealth creation, with proposals for simplified regimes on diverse investments like cryptocurrencies and ESG funds. Regulatory rewinds highlight enforcement shifts, including tribunal rejections of unwarranted re-characterizations for captives.
The Big Picture: Balancing Growth and Revenue
India’s taxation saga is a high-stakes game of cat and mouse between attracting FDI and safeguarding revenues. While retro demands and GAAR enforcements may deter short-term players, they promote transparency and substance—key to sustainable growth. For MNCs, the lesson is clear: Adapt or risk the taxman’s knock. As 2026 unfolds, watch for more treaty tweaks and perhaps a softening in Budget announcements to restore investor faith. In this evolving narrative, one thing’s certain: India’s tax code is no longer a passive player—it’s rewriting the rules of the game.