Spectrum Licensed to Telecom Companies: Another Frontier for the IBC

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Interaction of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) with various sectors of the economy – aviation and real estate – has produced uneven results. Telecom sector brings forth its own set of issues. The Supreme Court in its recent judgment of State Bank of India v Union Bank of India (‘SBI case’) has accorded primacy to the Indian Telegraph Act, 1885 and its attendant regulatory framework, potentially throwing a spanner in the efficacy of IBC for telecom companies. The narrow issue was whether spectrum – held under a license by telecom companies – is an asset that can be subjected to corporate insolvency resolution proceedings (‘CIRP’) under the IBC. The Supreme Court answered in the negative and held that telecom companies do not own the spectrum, and it cannot be categorized as their asset under the IBC. 

The broader framework – previously endorsed in  Property Owners Association & Ors v State of Maharashtra & Ors – within which the Supreme Court decided the case was that spectrum is a finite natural resource and belongs to the people. The Government acts as a trustee in distributing these natural resources and is constitutionally bound to distribute spectrum to sub-serve common good. The Supreme Court held that telecom companies possess a limited right to use the spectrum and do not own it. And treatment of spectrum as an asset by telecom companies in their balance sheet is not determinative of the nature of spectrum. Instead, the relevant telecommunication laws – and license conditions – provide the answer to question if spectrum is an asset or not. Further, the Supreme Court held that the IBC cannot displace telecommunication laws as the latter determine conditions for grant, use, and transfer of spectrum.  

This article attempts to highlight three aspects of the SBI case: firstly, an acknowledgment that natural resources cannot be treated as objects of private ownership does not naturally lead to the conclusion that they cannot be treated as assets for CIRP; there is a ‘reasoning gap’ between the statement and its conclusion; secondly, potential implications for companies in other sectors where use of licenses for exploiting natural resources is the main business activity and, the license, a vital asset of such companies; thirdly, by treating spectrum as incapable of being subjected to CIRP, the recovery of pending dues by the State may not materialize or alternatively, push negotiations outside the framework of IBC. Both eventualities do not serve the IBC’s purpose. Finally, this article examines the broader issue of reconciling telecommunication laws with the IBC and makes a case that the latter should override the former and all sectoral laws should accommodate the contingency of licensee’s insolvency to harmonize the objectives of both laws.    

Background

The Aircel Group entities (‘Aircel’) were granted telecom licenses by the Department of Telecom (‘DoT’) under license agreements which were valid for twenty years. Aircel availed loan facilities from domestic lenders such as the State Bank of India for its business. Aircel, on failure to pay license fees to the DoT, initiated voluntary CIRP under Section 10 of the IBC. The DoT challenged resolution plan approved by the NCLT via an appeal before the NCLAT. The NCLAT’s three observations that are relevant to this article are: (a) spectrum is an intangible asset of Aircel; (b) DoT is an operational creditor of Aircel in relation to pending payment of license fee and usage charges’; (c) spectrum cannot be utilized without clearing pending dues as CIRP cannot be used to wipe out statutory dues. The last two observations are, inter-se, inconsistent. If the DoT was accepted as an operational creditor, it should have been paid as per the approved resolution plan. The NCLAT by observing that payment of pending license fees to the DoT is pre-condition for utilization of spectrum indirectly categorized the DoT as a ‘pre-eminent creditor’. A situation not endorsed by the IBC. The Supreme Court disagreed with the NCLAT’s first observation itself and held that spectrum is not owned by a licensee such as Aircel, is not its asset, and cannot be subjected to CIRP.  

Spectrum Trading Subject to Clearance of Dues   

The Supreme Court examined the nature and conditions of the spectrum license and made three pertinent observations: (a) the DoT’s powers as a licensor are not merely contractual in nature but emerge concurrently from the Constitution and statute; (b) the license does not confer ownership or proprietary interests to the licensee merely a right to use the spectrum for a limited duration; (c) the licensor maintains absolute control over the licensee including rights of the latter to create third-party rights or transfer the spectrum. The latter was evident in The Guidelines for Trading of Access Spectrum, 2015 which stipulate certain conditions that need to be fulfilled for spectrum trading.  The Supreme Court cited Guideline 11 which mandates a licensee to pay all pending dues before concluding any agreement for spectrum trading. And Guideline 12 under which the Government reserves the right to claim any subsequent dues discovered from either of the two parties, jointly or severally. 

Core condition of spectrum trading under the license can thus be spelled out: if a licensee has pending dues, it cannot trade spectrum unless pending dues are paid. But does this condition apply even during a CIRP under the IBC? If a licensee is undergoing CIRP, can a successful resolution applicant can acquire its license without paying the (entirety of) pending dues? The Supreme Court answered in following words: 

The Spectrum Trading Guidelines cannot be overridden or substituted by the insolvency resolution framework. Dues payable to the Licensor, which must be cleared prior to spectrum trading, cannot be relegated to treatment under a Resolution Plan. (para 29)   

The Supreme Court endorsed this position by reasoning that payment of pending dues is an absolute condition. And that the IBC cannot bypass telecommunication laws by treating spectrum as an asset. Nor can the non-obstante clause of the IBC – Section 238 – wherein it overrides all other laws can be used to displace the condition of payment of pending dues before transferring the spectrum. Supreme Court’s reasoning suffers from a few limitations, as I elaborate in the subsequent sections.  

Understanding Implications 

Firstly, Supreme Court’s conclusion is encased in the constitutional framework of natural resources being owned by the people. The emphasis on the absolute and pervasive control of the DoT on all aspects of spectrum – tradability, transferability – was one reason to conclude that licensee did not own the spectrum.  Supreme Court’s understanding that natural resources such as spectrum are licensed by State largesse and do not result in change in ownership is plausible on a standalone basis. However, this understanding does not naturally lead to the conclusion that spectrum cannot be subjected to CIRP. The Supreme Court justified the conclusion by referring to Section 18 of the IBC wherein assets of a corporate debtor include intangible assets owned by the corporate debtor. However, Section 18(f) states that it includes ‘any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor …’. Thus, merely ownership of an asset is not a condition, its reflection as an asset in balance sheet is also crucial. However, the Supreme Court emphasized on the former and reasoned that treatment of spectrum in a balance sheet was not determinative of ownership of an asset. But, did not engage with the language of Section 18(f) which mentions ownership of an asset and its treatment in the balance sheet.     

Also, the Supreme Court arrived at its conclusion by identifying telecommunication laws as the ‘legal province’ of spectrum and observing that the IBC cannot alter conditions for license prescribed by the former. The Supreme Court observed that if the DoT forgoes pending dues under a resolution plan, it will be acting contrary not only to telecommunication laws but also to its constitutional obligations. The IBC’s competing aim of rescuing the licensee pales in comparison to constitutional mandate of distribution of natural resources for the common good. The Supreme Court’s approach does not acknowledge that transfer of spectrum as an asset – under the approved resolution plan – would also take place under a constitutionally valid law, i.e., the IBC. And the DoT’s legal and constitutional mandate of securing pending payments cannot be secured merely under telecommunication laws. Though once the Supreme Court identified latter as the relevant laws, applicability of the IBC was only possible if the special circumstance – of financial distress – that precipitate the CIRP were acknowledged. But the Supreme Court insisted on the absolute nature of telecommunication laws, unqualified adherence to conditions of licenses, and impliedly endorsed the position that any reduction or non-payment of pending dues will be a betrayal of the constitutional mandate to secure natural resources for common good.  

Secondly, the Supreme Court’s observations create potential issues for similarly placed companies whose licenses are one of their most valuable assets. For example, companies that have secured mining licenses – for coal and other natural resources – may face similar legal situations wherein the State may claim priority for any pending dues under the respective licenses. For such companies, a mining license is their core asset and if it does not form part of CIRP, the IBC’s aim to rescue such companies may fail. Other companies will have little incentive to participate in CIRP and rescue the company if they cannot control the latter’s most lucrative asset, i.e., the license. The only caveat is that the Supreme Court’s conclusion in the SBI case is based on its examination of the relevant telecommunication laws. And the specific legal and regulatory framework for such other licenses and terms of licenses may determine the outcome in those cases. Though the State is likely to use the SBI case as an instrument to claim payment of all pending dues under a license.   

Thirdly, it is worth highlighting that the corporate debtor’s unwillingness or inability to pay the pending dues is the reason that CIRP is initiated. In such a situation, the DoT’s insistence that the corporate debtor pay all pending dues may not materialize. The other plausible option is that a resolution applicant’s whose plan is chosen by the CoC makes payment to the DoT before getting the plan approved by the NCLT. But if one operational creditor – the DoT, even if it is a statutory body – gets paid on priority and in full under the resolution plan it prejudices claims of other operational creditors. And payment of dues to the DoT on priority has no statutory basis under the IBC. The third option is of corporate debtor entering negotiations outside the IBC framework. A telecom company – unable to unwilling to pay dues – may enter into an agreement with a willing buyer wherein the latter pays the pending dues and buys the spectrum. The Supreme Court’s judgment may push financial distressed telecom companies towards these negotiations that will occur outside the IBC’s framework. 

I suggest that all three possible options elaborated above defeat the IBC’s objective of providing timely resolution of a distressed corporate, accounting the interests of all stakeholders, and maximizing the value of corporate debtor’s assets. Payment to the DoT, on priority, prejudices other creditors and is at odds with prescribed mechanisms under the IBC. While initiation and completion of any negotiations outside the framework of the IBC prevents the corporate debtor from taking advantage of a law enacted for the purpose of corporate rescue and can potentially sideline other stakeholders. On balance, I would argue that the obligations of outstanding debts and pending dues are better recast and negotiated under the IBC’s framework and not beyond.       

Reconciling Telecommunication Laws with the IBC    

Supreme Court’s judgment in the SBI case implies that all dues that a licensee owes to the State are to be recovered as per the telecommunication laws, and the IBC cannot influence the nature and quantum of pending payments. The fact that the licensee is financially distressed and is seeking rescue under the IBC via CIRP is immaterial. The Supreme Court observed that payment of pending dues is an ‘absolute’ condition under the telecommunication laws and the IBC cannot displace it. There are two aspects worth examining in respect of the Supreme Court’s above observations. 

Firstly, let us look at Explanation to Section 14(1) wherein it is stated that the Central Government, State Government, local authority or sectoral regulator shall not terminate a license, permit or quota on grounds of insolvency; provided there is no default in payment of dues during the moratorium period. This provision reduces the elbow room for a licensor such as the DoT to terminate a telecom license on grounds of non-payment of dues caused by insolvency or initiation of CIRP. While Section 14 of the IBC seemingly constraints the powers of licensors to terminate licenses, it also reveals that a reconciliation between the IBC and licensing powers of the State is possible. Latter is forced to acknowledge financial distress of the corporate debtor, restrain from termination of license, and acknowledge the IBC’s purview. 

In fact, I would argue that Section 14 envisages that all dues relating to licenses should be resolved as part of CIRP and not independent of it. Explanation to Section 14(1) prevents cancellation of licenses to preserve status quo until a resolution plan is approved. The explanation is premised on the fact that all pending dues in relation to a license shall be resolved as per the resolution plan. Else, if the recovery of dues of a license – telecom or otherwise – was envisaged to be independent of the CIRP there is little reason to prevent cancellation of licenses. The presumption is that natural resources in possession of a licensee even if not owned by it have value that can be accounted for in the resolution plan. And pending dues paid accordingly. This ensures that all pending dues under a license are paid to the licensor as part of CIRP, the corporate debtor is rescued, and all its financial obligations are addressed comprehensively under the IBC itself. While it is trite that natural resources cannot be privately owned, it is also vital to acknowledge that a license confers economic and exploitation rights to the licensee. While the Supreme Court – in the SBI case – examined the issue of economic rights, it looked at solely from the lens of ownership of asset and did not engage in a deeper analysis of their interaction with insolvency. Economic rights in relation to the natural resources are a crucial asset that are subject to license conditions, but insolvency is a special condition and provides a persuasive reason to deviate from standard license conditions.     

Secondly, only a related note, it needs to be underlined that non-obstante clause of the IBC serves multiple purposes. To begin with, it indicates that – to the extent of inconsistency – the IBC prevails over all other laws since it is an exhaustive law. The Supreme Court has clarified the exhaustive nature of IBC sufficiently. In matters relating to insolvency, the IBC prevails over all other laws. Even sectoral laws. The IBC does not ‘displace’ sectoral laws but only ensures that in matters relating to insolvency no other law be applicable to ensure predictability and certainty in CIRP. Further, I would argue that the non-obstante clause also underlines that the IBC hovers over all sectors of the economy and applies to all companies. It is sector agnostic. Thus, it is the sectoral laws that need to adjust to the presence of IBC and not the other way around. The Supreme Court – in the SBI case – reasoned that applying the IBC to telecom sector will cause disharmony. And the harmony, as per the Supreme Court could only be served by observing the license conditions in isolation from CIRP. The Supreme Court concluded: 

The two statutes have different subjects to deal with, different purposes to subserve, different laws to abide, protect different rights and create different liabilities. It is necessary for the constitutional courts to recognize their respective provinces and to ensure that they operate with harmony and without conflict. (para 68)         

If both laws operate in their own provinces, then the harmony that prevails is only superficial. The harmonious approach endorsed by the Supreme Court has the potential of each sector regulator – in its capacity as a licensor – claiming a privileged position as a debtor. And, rendering the non-obstante clause of the IBC subject to vagaries of various sectoral laws and license conditions. At the very least, it will jeopardize attempts at rescuing various kinds of companies under the IBC, especially the ones that have secured licenses from the State. 

Conclusion

Supreme Court’s observations in the SBI case, in effect, privileges dues owed to the State under a license. And there are scarcely justifiable reasons why pending dues under a license cannot be recovered – in part or full – as part of the resolution plan. The conditions of payment under a license should be respected unless a CIRP is commenced. The latter – once commenced – should have the effect of varying the contractual obligations as it is a special circumstance. But insistence on absolute nature of payments on constitutional grounds and sub-serving common goods does little to increase the likelihood of payment of pending dues. And if a successful resolution applicant does pay the dues to the State on priority, it amounts to redesigning the IBC in favor of the State. While, ideally, the State should actively concede its claims to help revive a corporate debtor instead of saddling it with full recovery amounts.   

Money Displaces Skill-Chance Distinction: Examining Taxation and Regulatory Approaches to Online Gaming

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The Central Goods and Services Tax Act, 2017 (‘CGST Act, 2017’) and The Promotion and Regulation of Online Gaming Act, 2025 (‘OGA, 2025’) use money as the criteria to differentiate between various kinds of online gaming. In both legislations online gaming is the omnibus category while online money gaming is its sub-category characterized by players depositing monetary stakes. Section 2(80A), CGST Act, 2017 states that online gaming means a game offered on the internet or an electronic network and includes online money gaming. Section 2(80B), in turn, defines online money gaming as online gaming in which players deposit money in the expectation of winning a monetary prize whether the outcome is based on skill, chance or both. The OGA, 2025 also adopts similar definitions for online gaming and online money gaming in Section 2(f) and 2(g) respectively. And prohibits any person from offering online money games. While other forms of online gaming – where monetary stakes aren’t involved – are permissible.  

Both the CGST Act, 2017 and the OGA, 2025 are a marked departure from most previous legislative interventions on gambling in one significant aspect: they render the distinction between games of skill (‘gaming’) and games of chance (‘gambling’) as irrelevant qua online games. Instead, they use money as the differentiating factor between online gaming and online gambling. The OGA, 2025 gives central place to ‘nature of the electronic medium’ and is premised on online games being a sui generis category incomparable to physical or in-person games. Preamble of the OGA, 2025 mentions propensity for addiction to online money games, their manipulative design, and addictive algorithms as reasons for prohibiting them. The CGST Act, 2017 also dispenses with the skill-chance distinction. The Revenue’s view as evidenced by its arguments in Gameskraft Technologies Private Limited v DGGSTI (‘Gamekraft case’), is that use of monetary stakes by players in an online game per se amounts to gambling. And online gaming providers’ insistence on monetary deposit by players as a pre-condition for playing instead of assessing players’ skills implies that online money gaming is gambling. 

This article examines the Parliament’s use of money instead of the skill-chance criteria for online games from two perspectives: taxation and regulatory. And concludes that apart from subjecting online money gaming to an onerous tax there is little merit in equating it to gambling under the CGST Act, 2017. While the OGA, 2025 treats all online money games alike to effectuate an immediate and blanket prohibition. But the prohibition raises novel constitutional questions. For example, as per the doctrine of res extra commercium gambling is not protected under Article 19(1)(g) of the Constitution. Though gaming enjoys the said protection. But scope of the doctrine of res extra commercium was determined in the context where skill-chance criteria was used to distinguish gaming from gambling. Now, if money is used to differentiate online gaming from online gambling, does it, by default, expand the doctrine of res extra commercium? There is no clear answer. The article concludes that despite the Union of India’s claims to the contrary, both the above legislative interventions, independently and cumulatively, are aimed at throttling the online gaming sector. Going forward, reconciling skill-chance criteria with the yardstick of money in online games may be more appropriate instead of viewing both as binary options. But adopting such an approach will require reorienting the legislative aims towards regulating the online gaming sector and not paralyzing it.    

Skill-Chance Distinction in GST Gives Way to an Onerous Tax 

Before 2023, the CGST Act, 2017 recognized that gaming was distinct from gambling. And the distinction was visible in definition and applicable tax rates. Section 2(52) of the CGST Act, 2017 read with Entry 6 in Schedule II of the CGST Act, 2017 included actionable claims in the definition of goods. And, subjected only three actionable claims – lottery, betting and gambling – to GST. Online gaming was included in Section 2(17)(vii), The Integrated Goods and Services Tax Act, 2017 (‘IGST Act, 2017’) under the broader category of ‘online information and database access or retrieval services’ (‘OIDAR’). The GST rates for gambling and gaming were – before 2023 – 28% and 18% respectively. And while online gambling as an explicit category did not exist one could argue that it was subsumed under gambling.

The terms lottery, gambling and gaming have specific meanings under gambling law jurisprudence. And their use in the CGST Act, 2017 implied that the Parliament wished to import the same meaning in GST. However, in Gameskraft case, the Revenue insisted that online money gaming – even it involved skill – is gambling and departed from previously understood meaning of gambling. The Revenue’s view was not founded on online games being distinct from physical games but on its overemphasis on the use of money in online money gaming and its reinterpretation of the jurisprudence on skill-chance distinction.

In Gameskraft case, the Revenue claimed that online money gaming is gambling because an online gaming provider mandates deposit of monetary stakes by players who then play with the expectation of winning a bigger prize money. The Revenue’s view can be understood through the example of rummy. In the context of in-person rummy, the Supreme Court in State of Andhra Pradesh v K Satyanarayana & Ors (‘Satyanarayana case’) held that rummy is a game of skill since building rummy requires memorizing of cards and how to hold or discard cards. But the Revenue resisted applying the above reasoning to online rummy. The Revenue cited online gaming providers necessitating deposit of monetary stakes by players before permitting them to play online rummy. Compulsory stakes made online rummy distinct from physical rummy. The latter, the Revenue claimed, can be played with or without such stakes. In Satyanarayana case, the Supreme Court held that gaming for a monetary prize does not transform it to gambling. A view that aligns with the pre-dominant test laid down in State of Bombay v R.M.D. Chamarbaugwala (RMDC-I case). In RMDC-I case, the Supreme Court held if chance overpowers the skill of players and to a substantial degree influences result of a game then the game is gambling. Else it is gaming. The test is to determine if skill chance dominates skill or otherwise. The Revenue further claimed that the deposit of monetary stakes by players amounted to placing a bet on an uncertain outcome since players did not know result of the game. In both gaming and gambling the outcome is uncertain when stakes are placed by players at the beginning of or during a game. But the only relevant inquiry is whether it is skill or chance that pre-dominantly influences outcome of the game. And not that players deposited or did not deposit a monetary stake.

The Revenue, in Gameskraft case, also argued that the gambling nature of online money gaming was evident from online gaming providers charging a higher platform fee if the players increased their monetary stakes. In this respect, the ratio of Satyanarayana case states that only if the club earns extraordinary profits that an argument of gambling can sustain. But an extra charge by a club for providing facilities or to recoup expenses is insufficient to make the claim that a club facilitates gambling. Thus, merely charging a platform fee does not making an online gaming provider a facilitator of gambling. And, if an online gaming provider charges proportionately higher platform fee if players deposit higher monetary stakes, it is arguably operating within the boundaries of Satyanarayana case. Admittedly, though, there is no clear criteria to separate ordinary profits from extraordinary profits. Anyhow, the Revenue collapsed all the above nuances and insisted that mere presence of money in a game and an online gaming provider charging a platform fee transforms online money gaming into gambling.       

Another implied reason for the Revenue’s stance was that online gaming providers were taking advantage of tax arbitrage and offering online gambling but disguising it as online gaming to pay a lower GST rate of 18% instead of 28%. A prudent approach to address this alleged tax avoidance would have been to use the skill-chance criteria to verify the nature of online games. For example, the Punjab & Haryana High Court in Shri Varun Gumber v UT of Chandigarh & Orsused the skill-chance distinction to hold that online fantasy games are gaming and not gambling. The Bombay High Court adopted a similar approach in Gurdeep Singh Sachar v Union of India to clarify the applicable GST tax rate for online fantasy games. Additionally, in Gameskraft case, the Karnataka High Court held that online rummy was gaming by relying on the skill-chance distinction. There is no fatal flaw in applying the skill-chance distinction to online games. But since the skill-chance distinction is rooted in physical or in-person games, tailoring it to online games may require making additional inquiries. Possibly a case-to-case assessment as to whether adaptation of a game to an online medium alters its skill-chance balance to change its nature from gaming to gambling. The bias of algorithms, certification of dice, possible use of bots or fake online accounts are some relevant factors to consider in determining the nature and integrity of online games. While an exclusive reliance on money as a criterion to categorize online games is a broadbrush approach towards online gaming that saves such additional, but prudent, inquiries.     

The Karnataka High Court in Gameskraft case rejected the Revenue’s stance. But the Revenue instead of reconsidering and moderating its tax demands catalyzed amendments to the CGST Act, 2017 and IGST Act, 2017 that reinforced its position on online gaming. The CGST (Amendment) Act, 2023 inserted the definitions of online gaming and online money gaming referred above. Simultaneously, Section 2(102A) of the CGST Act, 2017 read with Entry 6 in Schedule II of the CGST Act, 2017 included online money gaming within the scope of specified actionable claims and subjected it to GST.  

An equally pertinent change was the GST Council’s recommendation that for online money gaming the measure of tax be changed to turnover basis. Various states in the GST Council justified the use of turnover basis instead of Gross Gaming Revenue (‘GGR’) by arguing that it was difficult to compute the latter. To exemplify the quantum of change caused by changing measure of tax from GGR to turnover: suppose two players stake Rs 50 each to play online rummy and the online gaming provider deducts a platform fee of Rs 10 with the remaining Rs 90 being monetary prize to be transferred to the winning player. Use of GGR as measure of tax will imply that GST is calculated on Rs 10, the platform fee charged by the online gaming provider. While use of turnover basis will imply that GST is calculated on Rs 100. Assuming a rate of 28%, the GST burden on one such transaction increased from Rs 2.8 to Rs 28. A ten-fold increase in tax liability. 

The amendments in GST laws made in 2023 created an onerous tax liability for online gaming providers. And in doing so, GST departed from its nature as a value-added tax by choosing turnover as measure of tax instead of the value generated by an online gaming provider. To compare, in banking transactions or securities transactions, GST is computed only on service fee charged by banking intermediaries or stockbrokers. And not on face value of the transaction. Online gaming providers were singled out to bear a disproportionately heavy tax burden. The onerous nature of changes is further compounded by the Revenue’s insistence that the amendments to GST laws in 2023 will be implemented retrospectively. Finally, alongside the amendments to GST laws, the obligation of deducting 30% tax at source on net winnings in online games was introduced in 2023 under Section 194BA of the Income Tax Act, 1961. The amendments to GST laws and the Income Tax Act, 1961 interlock to reveal that online money gaming is subjected to an exceptionally onerous tax liability. The Revenue has cited various reasons to support the above changes: online gaming providers were indulging in tax evasion, tax arbitrage and lack of legal clarity on taxability. But all the above reasons disguise that GST laws were amended in 2023 to throttle the online gaming sector. 

Understanding Blanket Prohibition on use of Money in Online Gaming  

The OGA, 2025 bans online money gaming while permits other forms of online gaming. The distinction between the two games is like the CGST Act, 2017. The OGA, 2025 is the most prominent legislative intervention in regulating online gaming, though various states have previously tried to outlaw online gaming without much success. Constitutional concerns on the OGA, 2025 are manifold including the Union’s legislative competence since ‘betting and gambling’ is a subject in Entry 34 of List II of the Seventh Schedule. But a focus on the OGA, 2025 adopting money as the criteria to permit or prohibit online games and treating skill-chance criteria as irrelevant reveals its own set of challenges.  

In RMDC-I case, the Supreme Court invoked the doctrine of res extra commercium to hold that gambling does not enjoy the protection of Article 19(1)(g) of the Constitution. Only gaming can claim such a protection. This position of law has allowed the states to impose outright bans or onerous conditions on gambling without satisfying the requirement of reasonableness. While any restrictions on gaming can be tested on the touchstone of reasonableness under Article 19(2) of the Constitution. But when the OGA, 2025 unifies gaming and gambling under a single category of online money gaming, the applicability of res extra commercium raises novel questions. Can the Union persuasively argue that the doctrine of res extra commercium, by default, applies to online money gaming? The Supreme Court propounded the doctrine of res extra commercium in the context of physical games that were distinguished by adopting the skill-chance criteria. If the Parliament, under the OGA, 2025, adopts an alternate criteria like money to distinguish online gaming from online gambling the scope of doctrine and its applicability to online games should ideally be re-examined. One way for the Union to successfully claim that the scope of the doctrine of res extra commercium is different – and more expansive for online games – will be to establish that online medium is incomparable to physical games. An onerous and unprecedented task.  

The comparable point of reference for the OGA, 2025 is a handful of state legislations – such as those enacted by Karnataka and Tamil Nadu – wherein blanket bans on online games were sought to be imposed. And writ petitions challenging their constitutionality succeeded inter alia because states could not discharge the burden that gaming transforms into gambling merely because games are played online. Or that mere use of money is sufficient to convert gaming into gambling. For example, in Junglee Games Pvt Ltd v State of Tamil Nadu the Madras High Court refused to acknowledge that ‘medium based regulation’ is permissible. The Madras High Court conceded that online games are incomparable to physical games. But, at no point, did it abandon the skill-chance criteria to examine the online gaming-online gambling distinction. The State of Tamil Nadu was required to discharge two related burdens: first, gaming transformed into gambling merely because it was played online; second, that use of monetary stakes by players converted gaming into gambling. Latter required establishing that it is monetary stakes and not skills of players that influence outcomes of games. And former required examining each game along with the terms and conditions imposed by online gaming providers. Inability of the state to discharge these burdens resulted in the Madras High Court holding that a blanket ban on online games is unconstitutional. The Karnataka and Kerala High Courts have adopted similar approaches in striking down blanket bans on online gaming.    

The only judicial approval to online money games being subject to more onerous restrictions was in Play Games 24×7 Limited v State of Tamil Nadu. But this case was in the context of additional restrictions on online money games and not their outright prohibition. State of Tamil Nadu under the Tamil Nadu Prohibition of Online Gaming and Regulation of Online Games Act, 2022 promulgated the Tamil Nadu Online Gaming Authority (Real Money Games) Regulations, 2025 (‘RMG Regulations’). Regulation 4(viii) of the RMG Regulations mandated that ‘blank hours’ shall be implemented for real money games from 12 midnight to 5 am. Petitioners challenged the validity of Regulation 4(viii) on various grounds including selective targeting of online money games. Petitioners claimed discrimination by arguing that online movie platforms such as Netflix were not subjected to similar blank hours. The Madras High Court mentioned few characteristics of online money games that in its view made them incomparable to other online platforms. 

The Madras High Court noted that entertainment platforms such as Netflix require a monthly fee as opposed to repeated requirement of deposit of monetary stakes in online money games. And neither can online money games be compared to free online games. Also, there is novelty in online poker and online rummy which until recently were played exclusively in person and where ‘reading the opponent’ was an essential part of the game. Whereas in an online poker or online rummy a person may not know their opponent lending online money gaming a distinct characteristic. Referring to the above distinct characteristics of online money games the High Court approved blank hours that were mandated only for online money games. 

The relatively narrow prohibition in terms of time and the High Court’s willingness to examine online money games with some level of detail provides a good starting point for framing reasonable restrictions instead of blanket bans on such games. But such an approach is worth pursuing only if the legislative aim is to regulate, while the OGA, 2025 demonstrates that the Parliament has preferred to prohibit online money games en masse instead of adopting a nuanced regulatory framework. 

Conclusion   

Change of applicable GST rates on online money gaming only partially captures the change effectuated in 2023. The change in measure of tax for online money gaming wherein tax is calculated on turnover basis instead of GGR reveals the true effect of tax increase. It converts GST into an onerous tax for online money gaming and subjects it to a tax burden but spares banking or securities transaction intermediaries. The OGA, 2025 is unambiguous that online money games are prohibited. The validity of such a prohibition will be decided in due course, but for now online money gaming is illegal. Even if the constitutional challenge to the OGA, 2025 succeeds then the tight GST noose will ensure that their survival is difficult if not impossible. Both the regulatory and taxation policies have converged to scuttle online money gaming. Only if the taxation and regulatory policy towards online money gaming shifts, or receives a judicial pushback, can a more prudent approach of synchronizing the skill-chance distinction with the monetary element lead us towards a more permissive taxation and regulatory framework. Currently, the taxation and regulatory approaches operate in tandem and aim the opposite: scuttling online money gaming.    

Buyback Tax: An Anti-Abuse Measure Wrapped in a Tax 

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Finance Bill, 2026 proposes to amend buyback tax. Yet again. The proposed amendment simultaneously simplifies and complicates buyback tax. Latter because of the proposal to create a separate tax slab for promoters of companies who participate in buyback of shares. Former because shareholders will be liable for capital gains instead of paying tax on the entire amount received on buyback. Too early to say if a separate tax slab for promoters is warranted, but the added layer of complexity neatly ties into chequered history of buyback tax, as depicted here.   

A simple conception of buyback tax would be – taxable amount is the difference between amount received by a shareholder on buyback and issue price of shares. And the amount is taxable in hands of shareholder as capital gains. But, akin to love, Indian tax policy on buybacks has rarely followed a straight path. In this article I provide a descriptive account of the origin and subsequent evolution of buyback tax in India upto its latest modification. I conclude that buyback tax is an example of how the Revenue, in its attempt to plug tax avoidance, unduly complicated the provisions of Income Tax Act, 1961 (‘IT Act, 1961’) in relation to buyback tax.    

Origin of Buyback Tax – Tied to Dividend Distribution Tax  

India introduced Dividend Distribution Tax (‘DDT’) in 1997 and made companies liable for tax on dividends. The Budget Speech of 1997 – by then Finance Minister P. Chidambaram – reasoned that introduction of DDT was to enable efficient collection of tax on dividend. It was easier to collect tax on dividends at the company level instead of tracking multiple shareholders. Also, DDT was introduced to discourage companies from distributing ‘exorbitant dividends’ to shareholders and instead further invest their profits. Consequent to introduction of DDT, companies started pursuing buyback of shares as an avenue to avoid payment of DDT. If a company was profitable, buyback of shares achieved the same objective as payment of dividends, i.e., sharing profits with shareholders. 

To prevent companies from circumventing their DDT obligations, buyback tax was introduced in 2013. Section 115QA, Income Tax Act, 1961 levied tax on ‘amount of distributed income’ by the company on buyback of shares. And distributed income was defined as the difference between consideration paid by a company for buyback and amount received by it on issue of shares. Buyback tax was a convoluted tax since its inception. A company which was paying money to buy shares from its shareholders was made liable for buyback tax instead of the shareholders who received the money. But the original convoluted version of buyback tax can be explained in the context of DDT. 

DDT imposed tax liability on companies if they distributed dividends and buyback tax was introduced to prevent them from using buyback route to avoid payment of DDT. Imposing the burden of buyback tax on companies ensured that dividend distribution and buyback of shares attracted similar tax liabilities for companies. And companies did not use the latter for mitigating their DDT liability. In fact, the Memorandum to Finance Act, 2013 clearly stated that buyback was an anti-abuse measure. And the tax rates of DDT and buyback tax were also similar to prevent one being a more attractive option vis-à-vis the other. Buyback tax received the label of a tax but was, in effect, a backstop to prevent companies from circumventing their DDT obligations.  

Dividend Distribution Tax Laid to Rest 

In 2020, India abolished DDT and reverted to the classical system of dividend taxation where dividends are viewed as income in hands of shareholders. From 2020 onwards, tax liability for dividends is imposed on shareholders receiving dividends instead of companies distributing the dividends. DDT, the Union realized, was cumbersome and unnecessarily added to compliance obligations of companies. And presumably the original reason of discouraging companies from declaring exorbitant dividends was also a redundant policy. Nonetheless, the abolition of DDT removed the original incentive of companies to indulge in buyback of shares. And from here on we enter an even more confused – and difficult to fathom – domain of Indian tax policy in relation to buyback tax. 

Buyback tax was an anti-abuse measure for DDT and removal of latter demanded a simultaneous modification of the former. Ideally a removal of buyback tax altogether. But Indian tax policy doesn’t inhabit an ideal world. Far from it.         

Buyback Tax Complicated via Finance Act, 2024

In the period of 2020-2024, there remained a dissonance between dividend taxation and buyback tax. The burden of tax of the former was on shareholders while that of latter continued to be on companies. To correct this anomaly, there were two possible modifications for buyback tax: 

First, altogether remove it from the IT Act, 1961 since the original reason for its introduction, i.e., DDT ceased to exist. 

Second, by way of abundant caution shift the tax liability of buyback shares to shareholders aligning it with the classical system of dividend taxation implemented in 2020. Such a modification would have maintained tax parity between distribution of dividends and buyback of shares. 

Instead, Finance Act, 2024 propelled buyback tax to a complicated territory. Section 115QA of the IT Act, 1961 was amended to state that buyback tax shall not apply to buyback of shares that took place on after 1 October 2024. Effectively, ending the original avatar of buyback tax. 

However, the Finance Act, 2024 also simultaneously expanded the definition of dividend under Section 2(22) of the IT Act, 1961. Clause (f) was added which stated that dividend includes:

any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 (18 of 2013);  

The above expansion of dividend simply meant that any amount received by a shareholder as part of buyback of shares would be taxed as dividends. This was an opportunity to simplify the buyback tax. The Revenue could have chosen to levy income tax on shareholders on the difference price received on their shares and their cost of acquisition of such shares. The difference would have been classified as capital gains in hands of the shareholders. Instead gains from buybacks were clubbed with dividends. And to complicate the scenario further, Finance Act, 2024 also amended Section 46A of the IT Act, 1961 by adding the following Proviso:

Provided that where the shareholder receives any consideration of the nature referred to in sub-clause (f) of clause (22) of section 2 from any company, in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024, then for the purposes of this section, the value of consideration received by the shareholder shall be deemed to be nil.

Cumulative effect of both amendments was that the entire amount received on buyback of shares was taxable as dividends in hands of the shareholders under the head ‘income from other sources’. The more obvious choice of charging capital gains tax to shareholders on difference in cost of acquisition and consideration on sale of shares was bypassed. Instead, the cost of acquisition of shares was treated as capital loss because it was reasoned that shares were extinguished due to buyback. The Memorandum accompanying the Finance Bill, 2024 stated that:

Therefore when the shareholder has any other capital gain from sale of shares or otherwise subsequently, he would be entitled to claim his original cost of acquisition of all the shares (i.e. the shares earlier bought back plus shares finally sold). (emphasis added)

The tax liability on buyback after Finance Act, 2024 can be explained through this example: A shareholder acquired a share for Rs 100, sold it for Rs 150 during buyback. As per the above provisions the shareholder was liable to pay tax on the entire Rs 150. The amount of Rs 150 would be treated as dividend and taxable under the head ‘income from other sources’. To offset the taxation on entire consideration, shareholder was entitled to claim Rs 100 as a capital loss in the subsequent years and offset it against any potential capital gains earned in subsequent years. Apart from the complicated mechanism, an obvious flaw in this version of buyback tax was that capital loss could be offset ‘if’ a capital gain is earned in subsequent years. In the absence of a capital gain against which to offset capital loss the taxpayer could suffer an onerous tax burden.   

Speculation – and informed guesses – suggest that the above version of buyback tax was adopted in 2024 to prevent taxpayers from taking advantage of lower tax rates of capital gains. And instead tax was levied on entire consideration under the head of ‘income from other sources’. There is some credibility to this guess but it doesn’t reveal a sound tax policy. There is little debate as to whether shares constitute capital assets. Any gains earned on their sale are, in their true nature, classifiable as capital gains. Whether the sale happened as part of a buyback or in course of normal alienation of shares should be immaterial. To gain marginally more revenue, provisions were amended and complicated to classify the gains under another head of income. In simple terms, the modification of buyback tax in 2024 sacrificed simplicity and unduly complicated the relevant provisions of IT Act, 1961.   

Proposed Amendment in Finance Bill, 2026

Realizing the complications created by amendments of 2024, the Memorandum accompanying Finance Bill, 2026 states the reasons for new set of amendments as:

It is proposed to rationalise the taxation of share buy-backs by providing that consideration received on buy-back shall be chargeable to tax under the head “Capital gains” instead of being treated as dividend income. (emphasis added)

The Union complicated buyback tax in 2024 and in 2026 the Union proposes to ‘rationalise’ it. How? By doing what it should have done in the first place: treat the consideration received during buyback of shares as capital gains and not dividend. 

But since this buyback tax, even in 2026 it has not outgrown its convoluted origins. The Finance Bill, 2026 proposes to levy buyback tax on promoters at a special tax rate because they hold a distinct position and exercise influence on corporate decision-making particularly buyback of shares. Accordingly the reason for special tax rate was in following words: 

it is proposed that, in the case of promoters, the effective tax liability on gains arising from buy-back shall be thirty per cent, comprising tax payable at the applicable rates together with an additional tax. In case of promoter companies, the effective tax liability will be 22%.

Treating promoters distinctly seems to flow from the suggested rationale of 2024 amendments. Levying buyback tax at a higher rate. While the 2024 amendments tried to sweep all shareholders in the higher tax rate, the 2026 amendments have limited the high tax rates to only promoters of companies. Though whether this will lead to a differential tax burdens for resident and non-resident promoters maybe worth examining, but maybe in a separate article. Here, it may suffice to say that time will reveal the durability of this version of buyback tax.

Conclusion 

The lifecycle of buyback tax can be summarised as a journey from an anti-abuse measure to an enduring revenue source. Buyback tax was not conceived as a tax per se. Originally, buyback tax was an anti-abuse measure to prevent companies from using it as means to avoid payment of DDT. While the original avatar of buyback tax – introduced via Section 115QA of the IT Act, 1961 – was convoluted, but it could be understood in the context of DDT. However, the removal of DDT left little reason to continue with buyback tax in its original version. But the amended version introduced in 2024 morphed buyback from an anti-abuse measure to a revenue source. And complicated buyback tax that it betrayed some basic principles of taxability. Devoid of the context of DDT, buyback tax from 2020 onwards has been a site of confused – and may I dare say – Revenue’s greedy tax policy. Nonetheless, the complications introduced in 2024 have been reckoned with via the Finance Bill, 2026. Though promoters of companies are unlikely to be too relieved at the latest proposed modification in buyback tax.       

Supreme Courts Uses Tax Sovereignty to Hunt Tiger Global

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The Supreme Court recently handed a significant legal victory to the Income Tax Department (‘Revenue’) in The Authority for Advance Rulings (Income-Tax) & Ors v Tiger Global International III Holdings (‘Tiger Global case’). And in the process created a significant shift in our understanding of income tax jurisprudence and tax treaty obligations. But, before we get to what the Supreme Court held, a short prologue.  

Prologue: Underlying Procedural Knot

Justice Mahadevan, in his leading opinion, concluded that the Revenue has proved that transactions in ‘the instant case are impermissible tax-avoidance arrangements, and the evidence prima facie establishes that they do not qualify as lawful.’ (para 50) (emphasis added)  

The above conclusion – lacking adequate basis – is crucial because of procedural backdrop of the case. Tiger Global companies (‘Tiger Global’) had filed an application before Authority for Advance Ruling (‘AAR’) seeking clarity on their obligation to withhold taxes. But, AAR rejected Tiger Global’s application on the ground that its arrangement was for avoidance of tax in India. If a transaction is ‘designed prima facie for the avoidance of income tax’, then AAR is obligated to reject the application under proviso (iii) to Section 245R(2). AAR found the above provision to be ‘squarely applicable’ to the case and rejected the application. The core finding of AAR was that Tiger Global incorporated in Mauritius lacked economic substance and its head and brain were located in the United States of America. Tiger Global, AAR noted, were ‘conduits’ for investments in Singapore and Mauritius.   

Tiger Global impugned AAR’s ruling before the Delhi High Court (‘High Court’). The Revenue contended that AAR had only given a preliminary opinion on chargeability to tax and there was no justification for the High Court to exercise judicial review. The High Court reasoned that reports of both Commissioner of Income Tax and AAR had ‘trappings of finality’ and ‘evident element of resolute decisiveness’. The High Court’s view was fortified by AAR’s observations on treaty eligibility and on chargeability of capital gains. The High Court, convinced that AAR had made substantial findings and not expressed a prima facie view, pronounced a detailed decision on merits. The High Court held that Tiger Global was not liable to tax in India and could avail treaty benefits under the India-Mauritius tax treaty.     

In appeal against the High Court’s decision, the Supreme Court has pronounced a detailed judgment but not gone into merits of the case. A fact that is difficult to come terms with once you read the judgment. Nonetheless, as per the Supreme Court the core question before it was: whether AAR was right in rejecting applications for advance rulings on grounds of maintainability and whether enquiry can be made if capital gains is chargeable.

In view of the above procedural history, the Supreme Court’s conclusion that the Revenue has succeeded in proving that ‘prima facie’ Tiger Global’s arrangements are unlawful is vital. Since the Supreme Court Revenue has ruled in favor of the Revenue, the assessment of Tiger Global will materialize. Tiger Global, if it chooses, can lend quietus to the issue and pay tax or challenge the imminent assessment orders and indulge in another round of legal bout with the Revenue. That is all in the untold future, until then we have the Supreme Court’s judgment to contend with.   

Introduction

Supreme Court’s judgment can be analyzed on various axes: international tax law-domestic law dynamic, application of judicial anti-avoidance rule, prospective and retrospective applicability of amendments, trajectory of India-Mauritius tax treaty, eligibility for tax treaty benefits, relevance of secondary legislation such as circulars issued by the Revenue and norms of judicial propriety. Two crucial threads of the case – in my view – are the relevance of tax residency certificate (‘TRC’) and applicability of GAAR.

In brief, Supreme Court has held that TRC is necessary but not a sufficient condition to claim tax treaty benefits. Tiger Global possessing TRC of Mauritius does not preclude the Revenue from applying the substance over form test and deny assessee tax treaty benefits. In this article, I forsake an exhaustive commentary on the case, to make two narrow claims: 

First, the Supreme Court in holding that TRC is a necessary but not sufficient condition for claiming tax treaty benefits plays fast and lose with strict interpretation of Section 90(4) of the Income Tax Act, 1961 (‘IT Act, 1961’) and instead places greater reliance on legislative history and legislative intent while ignoring binding judicial precedents.

Second, I suggest that Tiger Global case unsettles well-entrenched axioms in income tax and tax treaty landscape. The most significant rupture is of the doctrine that tax treaties override domestic law if the former are more beneficial to the assessee. The Supreme Court had no qualms in stating that GAAR contained in a domestic law can be used to deny tax treaty benefits. An observation that appears unblemished, if we look at the underlying provision(s), but holds wider consequences for India’s tax treaty obligations.   

I conclude that the sub-par reasoning of the Supreme Court is attributable to its half-baked idea of tax sovereignty. The concurring opinion of Justice Pardiwala invokes tax sovereignty expressly while the leading opinion of Justice Mahadevan relies on it impliedly. In Tiger Global case, Indian Supreme Court has couched tax sovereignty in legal sophistry, without articulating it in any meaningful manner. In fact, the Supreme Court has exhibited a shallow view of international law – and by extension tax treaty – obligations by viewing them as dispensable and permitted unilateral actions by the Revenue in the name of tax sovereignty.     

I make the above claims fully cognizant of the fact that the Supreme Court’s judgment is, technically, not on merits of the case. But the Supreme Court’s observations are sufficiently detailed and such judicial observations deserve a scrutiny irrespective of narrowing framing of the issue. 

Factual Background 

The brief facts of the case are that Tiger Global acquired shares in Flipkart Singapore before 1 April 2017. The value of shares of Flipkart Singapore was primarily due to the assets the company held in India. In simpler terms, Tiger Global held some shares in holding company of Flipkart – Flipkart Singapore – which in turn controlled subsidiary Indian companies. And the value of shares of Flipkart Singapore was derived from the business and assets owned by its Indian subsidiaries. In August 2018, Tiger Global sold the shares as part of the larger restructuring wherein Walmart acquired majority shareholding in Flipkart Singapore. 

The sale of shares was an ‘indirect transfer’ because sale of shares of Flipkart Singapore indirectly transferred control of Flipkart’s Indian companies and business to Walmart. The sale, as per the Revenue was chargeable to tax under IT Act, 1961. Since the value of shares in Flipkart Singapore was primarily due to the assets it held in India, the legal fiction under Explanation 5, Section 9 was applicable as it deems such shares as located in India. Tiger Global contended that it was a resident of Mauritius, it had acquired the shares before 1 April 2017, and as per the India-Mauritius tax treaty it was liable to pay tax only in Mauritius.    

Tiger Global was riding on two major factors: firstly, that under the India-Mauritius treaty all investments made by residents of Mauritius before 1 April 2017 were grandfathered and were liable to tax only in Mauritius; secondly, if an assessee is resident of India’s tax treaty partner the IT Act, 1961 will only apply if it is more beneficial to the assessee. Thus, as per Tiger Global even if the transaction was liable to tax under Section 9, IT Act, 1961 the India-Mauritius tax treaty exempted it from tax in India and the treaty should override the statute. Widely held views amongst lawyers backed the former claim, decades of jurisprudence the latter.  

The Supreme Court rejected the arguments of Tiger Global and wrote a judgment premised on fanciful ideas of tax sovereignty and autonomy.    

Tax Residency Certificate: Necessary but not Sufficient  

In April 2000, the Revenue had issued Circular No. 789 to address the anxieties about tax liabilities of FIIs and other investment funds which operated from Mauritius and were incorporated there. The relevant portion of the Circular stated that: 

It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. (emphasis added)

In October 2003, the validity of Circular No. 789 was upheld by a Division Bench of the Supreme Court in Union of India v Azadi Bachao Andolan and Anr. The Supreme Court in upholding the Revenue’s power to issue Circular No. 789 endorsed its contents and the Revenue’s interpretation of the India-Mauritius tax treaty. In Tiger Global case, the Supreme Court instead of accepting this unequivocal position of law and engaging with it a meaningful manner, pursued the tangent of legislative history and amendment of Section 90 to conclude that TRC is not sufficient evidence of residence. The legislative history was the amendments made to IT Act, 1961 in 2012 and 2013 to primarily undo the effect of Supreme Court’s judgment in the Vodafone case.    

Finance Act, 2012 amended Section 90(4), IT Act, 1961 to state that an assessee is not entitled to claim relief under a tax treaty unless he obtains a certificate of being residence. In 2013, Finance Bill, 2013 proposed to introduce Section 90(5) in IT Act, 1961 to state that: 

The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein.

Due to backlash and concerns about the effect of proposed sub-section(5) on the Mauritius route, Finance Act, 2013 dropped the above version and instead introduced the current Section 90(5) which states that an assessee referred to in sub-section(4) shall also provide ‘such other documents and information’ as may be required.

Presuming the legislative history of Section 90 is relevant to adjudicate the issue in Tiger Global case, it is possible to derive two possible views from the above developments. One, adopted by the Delhi High Court was that:

issuance of a TRC constitutes a mechanism adopted by the Contracting States  themselves so as to dispel any speculation with respect to the fiscal residence of an entity. It therefore can neither be cursorily ignored nor would the Revenue be justified in doubting the presumption of validity which stands attached to that certificate bearing in mind the position taken by the Union itself of it constituting ―sufficient evidence‖ of lawful and bona fide residence. (para 199)

The High Court cited the Vodafone case to note that the Revenue’s power to investigate despite a TRC was confined only to cases of tax fraud, sham transactions or where an entity has no vestige of economic substance. 

The Supreme Court pointed the needle in other direction. The Supreme Court referred to the Explanatory Memorandum of Finance Bill, 2012 to observe that intent of amending Section 90(4) was that TRC is necessary but not sufficient evidence of residence. Reliance on supporting sources instead of interpreting the provisions is a curious approach and even the High Court traversed this path for no clear reason. 

The Supreme Court noted that while the legal position – that TRC is necessary but not sufficient – could not be codified due to withdrawal of previous version of Section 90(5), introduction of current version of Section 90(5) still introduced ambiguity if TRC was sufficient. But the Finance Ministry issued a clarification in 2013 that the Revenue ‘will not go behind the TRC’ and Circular No. 789 continues to be in force. And yet, the Supreme Court’s conclusion seems at odds with the clarification issued by the Finance Ministry. The Supreme Court concluded that: 

Section 90(4) of the Act only speaks of the TRC as an “eligibility condition”. It does not state that a TRC is “sufficient” evidence of residency, which is a slightly higher threshold. The TRC is not binding on any statutory authority or Court unless the authority or Court enquires into it and comes to its own independent conclusion. The TRC relied upon by the applicant is non- decisive, ambiguous and ambulatory, merely recording futuristic assertions without any independent verification. Thus, the TRC lacks the qualities of a binding order issued by an authority. (para 37)

The legislative intent in amending Section 90(4) was that TRC is necessary but not sufficient to claim treaty benefits. But such an unambiguous position never found its way in the statute. Instead, the Revenue to clarify the import of amendments to Section 90 stated – via the Finance Ministry – that Circular No. 789 is still in force. But the Supreme Court, relied on legislative intent and observed that TRC has ‘limited evidentiary value’ because of the statutory amendments that govern the field. Failing to note that the Finance Ministry issued its clarification in March 2013 – after the amendments.  

The import and of Section 90(5) was understood by the Supreme Court in following words: 

Section 90(5) mandated that the assessee shall also provide such other documents and information, implying that the existence of a TRC alone need not be treated as sufficient to avoid taxation under the domestic law. (para 12.24) (emphasis added)

Even if legislative history is relevant, the failure to engage with a binding judicial precedent – Azadi Bachao Andolan case – is indefensible. Supreme Court’s refuge was that amendments to IT Act, 1961 have changed the law. In stating so, it refused to acknowledge jurisprudence that High Courts have developed jurisprudence on TRC even after the amendments and the judicial view has largely been consistent with Azadi Bachao Andolan case. Perhaps engagement with the reasoning of High Court judgments and expressing better reasons for disagreement could have lent some credibility and weight to Supreme Court’s conclusions. And as the Revenue itself argued, Vodafone was not a treaty case, it involved interpretation of statutory provisions. Amendments to IT Act, 1961 in 2012 and 2013 to undo Vodafone cannot be used to bypass treaty obligations.  

The non-engagement with Azadi Bachao is what led Supreme Court to say that since the object of a tax treaty is to prevent double taxation, ‘for the treaty to be applicable, the assessee must prove that the transaction is taxable in its State of residence.’ (para 19) How damaging is this statement, we will only know in due time. For now, it suffices to say that it flies in the face of settled law on treaty interpretation that to avail a treaty benefit, a resident must only be liable to tax in another jurisdiction. Liability to tax cannot be equated to actual payment of tax. 

Also, interpreting tax statutes based on implication is a rare approach. Courts, including the Indian Supreme Court, have repeatedly exhorted that tax statutes need to be interpreted strictly. Adherence to strict interpretation is a sine qua non that courts only abandon in the face of ambiguity in a provision. In Tiger Global case, the Supreme Court seemed comfortable relying on legislative intent – revealed by Explanatory Memorandum – and dismissing binding judicial precedents and valid circulars by pointing at statutory amendments. 

Cumulatively, Supreme Court’s observations on TRC fall foul of strict interpretation of tax laws, disrespect judicial precedents, allow the Revenue to conveniently sidestep its own binding circulars and bring into question legitimacy of documents issued by India’s treaty partners. A stirred cocktail of tax misgovernance.   

Tax Treaty Overrides Domestic Law, GAAR is an Exemption  

The Revenue’s argument was that TRC only constitutes prima facie evidence of residence and cannot override substance over form. Even if TRC was not considered as sufficient, the Revenue had to rely on anti-tax abuse rules to claim that Tiger Global was a sham or a conduit. But the Limitation of Benefits clause (‘LOB clause’) in the India-Mauritius treaty was inapplicable to the transaction. So? GAAR came to the rescue. But the Supreme Court had to jump a few interpretive hoops to allow the Revenue to apply GAAR.  

Section 90(2) states that where the Union has entered a tax treaty with another State or jurisdiction that provisions of IT Act, 1961 shall apply to the extent they are more beneficial to the assessee. The import of this provision is that if a tax treaty is more beneficial it shall apply even if it is at variance with the IT Act, 1961. In successive decisions courts have upheld the above legal position and held that charge of income tax and determination of scope of income under sections 4 and 5 of IT Act, 1961 are subject to tax treaties. An uncontroversial position until 2012.   

In 2012, the Finance Act added sub-section (2A) to section 90 which states that: 

Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him.

Chapter X-A contains provisions relating to General Anti-Avoidance Rule, also introduced via the Finance Act, 2012. Section 90(2A) empowers the Revenue to apply a statutory anti-tax abuse rule to assessees who are covered by tax treaties. The exception in subsection (2A) then ensures that if the LOB clause of a tax treaty is not sufficient, GAAR can be invoked to address tax avoidance strategies.  

The Supreme Court took cognizance of the above provision, interpreted it strictly and noted that GAAR can apply to assessees covered by tax treaties. On the touchstone of strict interpretation, the Supreme Court was right in observing that GAAR can apply to assessees covered by tax treaties. But Supreme Court’s failure to engage to engage with decades of judicial precedents stating that domestic tax law cannot override tax treaties remains a fatal flaw of the judgment. Unless tax treaty provides that GAAR can apply in the absence/insufficiency of a LOB clause, Section 90(2A) amounts to a unilateral amendment of tax treaties. And the Supreme Court seems to have endorsed it.   

The other hurdle was grandfathering. Rule 10U(1)(d), Income Tax Rules, 1962 states that Chapter X-A containing GAAR shall not apply to income accrued or arisen from investments made before 1 April 2017. Tiger Global argued against application of GAAR citing the grandfathering contemplated in the domestic provisions. But the Revenue relied on Rule 10U(2) which states that: 

Without prejudice to the provisions of clause (d) of sub-rule (1), the provisions of Chapter X-A shall apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after the 55[1st day of April, 2017]. (emphasis added) 

Rule 10U(2), on first glance, negates the grandfathering contemplated by Rule 10U(1)(d). The Revenue made a similar argument. The High Court had refused to interpret ‘without prejudice’ to mean that GAAR could be applied to income from arrangements entered before 1 April 2017. The High Court noted that it should ‘eschew from’ interpreting a provision in a domestic statute that conflicts with a treaty provision. And concluded that accepting the Revenue’s argument would mean:

A subordinate legislation would thus stand elevated to a status over and above a treaty entered into by two nations in exercise of their sovereign power itself. (para 230)

The Supreme Court did not have similar qualms  as the High Court and accepted the fine distinction made by the Revenue. The distinction was that Rule 10U(1)(d) only grandfathered investments, while Rule 10U(2) uses the word ‘arrangement’ and thus the grandfathering benefit can only extend to investments and not tax avoidance arrangements, even if the latter were entered into before 1 April 2017. A strict interpretation of both Rules – supported by observations of the Shome Committee – will place Supreme Court’s conclusion in a defensible category. But what does it mean for India’s tax treaty obligations?   

A two-pronged thorn emerges: 

First, tax treaty override over domestic law will no longer be exhaustive by virtue of Section 90(2); Revenue can apply GAAR if LOB clause of tax treaty is insufficient by invoking Section 90(2A) read with Rule 10U. Domestic law, specifically, GAAR will act as a backstop to prevent tax avoidance. A legal position that the Supreme Court has accepted in Tiger Global case but flies in the face of decades of jurisprudence on income tax law and tax treaty interpretation.  

Second, relevant provisions of the India-Mauritius tax treaty refer to ‘gains’ not to investments or arrangements. Can domestic laws – including secondary legislation – now determine the scope of taxability and allocation of rights agreed upon tax treaties? The High Court said a categorical no, the Supreme Court said yes. The Supreme Court took refuge in the fact that amendments of IT Act, 1961  – specifically Section 90 – had changed legal landscape. Domestic landscape, yes. Treaty obligations, not. But, I guess, we are a sovereign country that can act independently and if need be in flagrant disregard of our treaty obligations.   

Conclusion

Tiger Global case is an attempt by Indian Supreme Court to flex tax sovereignty, without truly understanding it. The concurring opinion of Justice Pardiwala exemplifies this lack of understanding. He lauds India’s unilateral revocation of Bilateral Investment Treaties in 2016 and adds that an assertion of tax sovereignty is the power to make unilateral moves. What is being termed as tax sovereignty is polite speak for reneging on tax treaty commitments if revenue demands are not accepted unconditionally. Such prescriptions appeal to baser instincts of the State and do not aspire to tax governance founded on rule of law. Justice Pardiwala perfunctorily adds that India should negotiate tax treaties by including certain safeguards such as: GAAR should override tax treaty benefits. Another example of how he misunderstands manifestation of tax sovereignty. Is the assumption here that India’s treaty partners will simply agree to such clauses and not extract similar concessions for themselves. Justice Pardiwala not only exceeds his remit by providing policy prescriptions but provides them based on a shallow understanding of treaty dynamics and negotiations.    

To book end this article, Justice Mahadevan’s conclusion cited at the beginning where he concludes that the transactions of Tiger Global are impermissible anti-avoidance arrangements is based on facts that seem only privy to him and the Revenue. There is nothing in both the leading opinion and the concurring opinion to even provide a glimpse of reasons as to why the transactions and arrangements are impermissible anti-avoidance arrangements. If only Supreme Court judgments on tax issues were to provide us less tax history lessons, fewer policy prescriptions and substitute them with better reasoning, sound analysis of facts and accurate application of law.   

Health and National Security Cess: Some Context

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The Lok Sabha on 5th December 2025, passed the Health Security se National Security Cess Bill, 2025. The Health se National Security Cess (‘Health and National Security Cess’) is an unusual marriage of public health and national security. And an example that when the State is determined for revenue, even tax law is not alien to creativity. 

In the first part of this article, I examine the Union of India’s previous conceptualization – but inability to operationalize – a standalone National Defence Fund. Instead, six years after mooting the idea of a National Defence Fund, the Union seems to have adopted the relatively easy way of levying another cess for funding national security related expenses. In the second part of this article, I address the public health component. I state that income taxpayers currently pay a Health and Education Cess. The introduction of Health and National Security Cess means we have two ‘partial cesses’ for public health. Public health is crucial – and underfunded – to necessitate additional money via two cesses, but not crucial enough to deserve its own dedicated cess. Ironically, we still won’t know how much money from both cesses is will be specifically spent on public health. 

I conclude that while both national security and public health are crucial, the need for a cess apart from the general budgetary allocation requires a stronger – and better articulated – jusitifcation. Merely saying that the State needs additional revenue is not sufficient. Union and even States increasingly prefer cesses because they offer an easy route to raise additional money without adequate accountability. Successive Finance Commissions have recommended reduction in cesses on grounds of their misuse and lack of transparency. But the Indian tax policy landscape stubbornly moves in the opposite direction. 

I. Introduction 

Preamble of the Health Security se National Security Cess Bill, 2025 (‘Bill’) states that resources need to be augmented for meeting expenses on national security and for public health. The Health and National Security Cess has been termed as a ‘special excise cess’. Clause 3 of the Bill imposes tax liability on any person who owns, possesses, or controls or undertakes a process by which specified goods are manufactured. And Schedule I of the Bill lists pan masala as the specified good. Though the Union of India is empowered to notify ‘any other goods’ as specified goods under the Bill. Clearly the Health and National Security Cess can be extended to other ‘demerit’ goods to further augment revenue collection. Why do we need this cess? Augmenting of revenues is a standard reason and can be used for any tax and doesn’t fully explain the imposition and levy of Health and National Security Cess. The proximate reasons for the Health and National Security Cess are two-fold: 

One, as the finance minister explained in the Rajya Sabha, until September 2025 the levy of GST Compensation Cess ensured that de-merit goods such as tobacco and pan masala were subjected to a high tax rate of approximately 88%. With the rationalization of GST rates, the highest tax rate is now 40%, and GST Compensation Cess has been phased out. The Health and National Security Cess aims to preserve the previous revenue stream from demerit goods such as pan masala without disturbing the new three-tier GST rate structure.   

Second – and this is specifically for national security – the Union has been unable to operationalise a standalone Defence Fund. The idea of a Defence Fund was mooted by the Union six years ago. The Union in July 2019, amended the Terms of Reference of the 15th Finance Commission (‘Commission’) to specifically require the Commission to examine a separate mechanism for funding defence and internal security. The Commission was required to examine if a standalone Defence Fund should be set up and how it should be operationalized. The Commission in its final report – submitted in October 2021 – recommended establishment of the Defence Fund and also provided detailed and specific targets for a five-year period. But the Union did not take any concrete steps. Eventually, in December 2025 the Union has instead adopted the familiar path of levying a cess, i.e., the Health and National Security Cess.   

II. Defence and Internal Security

a. A ‘Defence Fund’ Conceptualized    

The Terms of Reference (ToR) of the 15th Finance Commission required it to examine whether a separate mechanism for funding of defence and internal security ought to be setup and how to operationalize the fund. The above clause was added in ToR via an amendment. And the request was also unprecedented since no previous Finance Commission had been tasked with a similar obligation. The immediate concern from States was that the Union may reduce funds available in the common divisible pool by earmarking a portion of States’ funds towards the ‘Defence Fund’. Various States made similar representations to the Commission arguing that they were not opposed to a Defence Fund if it does not shrink the common divisible pool. 

The Union – primarily through the Ministry of Defence and Ministry of Home Affairs – made a strong case for a Defence Fund before the Commission. Both Ministries made similar arguments, i.e., the budgetary allocations were insufficient to meet their capital expense needs for defence and internal security. And a Defence Fund will partially meet the shortfall.  

The Commission examined the issue in detail and recommended that the Union setup a dedicated, non-lapsable fund called Modernisation Fund for Defence and Internal Security (MFDIS). The Ministry of Defence was to retain exclusive rights over the MFDIS and Ministry of Home Affairs could only utilize a part amount for internal security. The Commission identified four specific sources for incremental funding and even provided annual targets to the Union of India. A screenshot from the Finance Commission’s report below shows it ambitious plan to earmark funds for defence and internal security. 

If the Commission’s recommendations were followed in totality, then in the past five years the fund would have accumulated more than two lakh crore rupees. While the amount may seem optimistic, we didn’t witness even an effort by the Union in meeting the Commission’s target. There was no public dissent from the Commission’s recommendations or a disagreement about its estimation or mention by the Union about the feasibility of a Defence Fund as understood by the Commission.

b. Defence Fund ‘Abandoned’, Cess Operational    

We have no publicly available information whether the concept of Defence Fund has been permanently abandoned. Or Defence Fund as envisaged by the Commission was not agreeable to the Union. We do have a curious situation where the entire idea of a standalone Defence Fund mooted by the Union seems to have been abandoned by it with no explanation. The Commission not only endorsed the idea of a Defence Fund but also provided a roadmap for operationalizing it. But the Union seems to have moved on. And instead, in December 2025, the Union has chosen to levy a Health and National Security Cess to meet defence needs. And the cess name indicates, it is a half measure towards defence needs. All funds raised through the Health and National Security Cess will not be exclusive to defence; a portion will be earmarked towards internal security needs and another portion towards public health. In what proportion will the funds of Health and National Security Cess be divided between defence, internal security, and public health is unknown. And probably will be for life.   

II. Public Health

Under Seventh Schedule of the Constitution, public health has been included in the State List. But income tax is the Union’s domain. The Constitution is silent if the Union can collect cess on a subject listed in the State List. The ‘constitutional silence’ on legislative competence on cess has allowed the Union to collect Health and Education Cess over and above the income tax. And the same leeway will probably extend to the Health and National Security Cess.   

a. Health and Education Cess 

Under the Income Tax Act, 1961 a ‘Health and Education Cess’ is levied and collected on 4% of income tax payable by an assessee. It is a compulsory levy on all income taxpayers. Again, how much of the money collected under this cess is allocated to health and education respectively remains unknown. From 2004 to 2018, income taxpayers paid an Education Cess which was levied at 2% and was later increased to 3% of income tax. In 2018, Education Cess was renamed to Health and Education and the rate was increased to 4% of total income tax. The Finance Minister estimated an additional Rs 11,000 crores annually because of the increase in cess rate. But the Finance Minister didn’t specify if the additional amount would be allocated to public health or education or generally the proportion in which the amount will be split between the two. Are we to presume that the additional 1% of the money collected under the Health and Education Cess is allocated to public health? Or is the money now equally divided between public health and education? We don’t have any clarity.    

b. Another Health Cess 

Despite there being a Health and Education Cess, the Union has chosen to levy the Health and National Securiy Cess. A relevant question is: if there is an already existing health cess, why levy another one? Is the money collected under the pre-existing Health and Education Cess insufficient for public health expenses? If yes, why not levy a dedicated public health cess? And what is the justification of coupling public health with national security? National security encompasses both defence and internal security. It won’t be unreasonable to presume that national security will claim lion’s share of the funds collected under the Health and National Security Cess. And since public health is not the Union’s domain, it is difficult to hold it accountable for utilization of funds for public health. At the same time, it is evident that the Union considers public health important to warrant two ‘partial cesses’. But not enough for public health to deserve a dedicated cess. Two half measures don’t make a full one. 

Conclusion 

The 15th Finance Commission in its report noted that the Ministry of Defence receives the maximum budget allocation amongst all the Union’s ministries. And yet, the Ministry of Defence argued before the Commission that a separate non-lapsable Defence Fund was necessary to meet increasing need for capital expenses. The Ministry of Home Affairs had also advocated for the Defence Fund since its budgetary allocations were termed as insufficient. And yet for four years – since the Commission provided a roadmap – we haven’t seen any concrete action to make the Defence Fund a reality. Instead, after six years of mooting the idea of Defence Fund and even receiving endorsement from the Commission the Union has decided to levy a cess to partially fund national security expenses. Levying a cess is convenient for the Union as it has to provide no estimate of fund collection, transparency is limited, and there is no clear roadmap of expenses and their allocation. And reliance on yet another cess reveals that national security rhetoric is easier but substantive measures on national security – even on the revenue side – require long, consistent groundwork.     

Finally, a general word on cesses. Cesses are a trick on the Constitution. The legal limits on powers to levy cess – of both the Union and States – are hazy. Supreme Court in a few instances has clarified the power to levy cesses in specific contexts, but broader issues remain unresolved and, in some instances, even unknown. It is the legal uncertainty on cesses that allows States to collect a ‘cow cess’ from purchasers of alcohol. It is the same legal uncertainty that allows the Union to levy cess on public health, a State subject. And the same uncertainty allows the Union to levy multiple cesses without appropriate accountability. Despite repeated recommendations from successive Finance Commissions, Comptroller and Auditor General of India, and even some States to reduce the no. of cesses the tax policy landscape in India stubbornly moves in the opposite direction.    

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