Private Equity Exit Through M&A And Its Tax Implications

Author: LawSphereX

Category: Taxation

Published: 2026-08-23T20:47:08.509356+00:00

Updated: 2026-08-26T17:10:02.899+00:00

PRIVATE EQUITY EXIT THROUGH M&A AND ITS TAX

IMPLICATIONS

Sanjith S, LL.B., Symbiosis Law School, Pune

ABSTRACT

The research article will delve into the role of Private equity and its exit through Mergers and Acquisitions route. It will start with the key parties to the exit transaction, such as Private Equity, Acquiring Company and Target Company. After this, discussion starts with M&A being the preferrable route of exit over the Initial Public Offering route and the Indian legal framework regulating M&A transactions. Then, the main element of this article, that is, tax implications of such transactions will be introduced by briefing on the relevant tax treaties and statutes, which will be discussed in detail in analysis part of the article. The article, then, sets foot on the key law statutes and regulations in context of Mergers and Acquisition.

Shifting to tax implications of the exit transaction, the article will discuss in detail on classification of the profit or income gained and the treaty hurdles. The article will move to Analysis part, where the detailed case analysis on Tier 1 Global PE firms in relate to Indian Companies have been discussed in line to treaty befitting and exploitation with the court rulings. And the article concludes with three key recommendations, balancing the interests of PE firms and the Indian Income Tax Department. Keywords: Private Equity (PE), Mergers and Acquisitions (M&A), Exit Route, Income Tax Act 1961, Double Taxation Avoidance Agreements (DTAA).

INTRODUCTION

Private Equity Firms (PE) are investment management firms that inject capital or provide financial backing in the startup or an existing company (known as “target company”) in return for equity of such target company. Then, PE will hold the equity for a long-term with an intention to a make profit by selling the shares, once after the target starts performing well in the market. The process of selling the equity of the target company by a Private Equity firm is termed as PE Exit. There are several means and ways for PE to exit the market by selling the target’s equity. Either the PE can choose to make profit by taking the Initial Public Offering (IPO) route by selling the target’s equity to public investors or taking the M&A route, where the PE makes profit through selling the equity to strategic buyer (known as “acquiring company”).

The strategic buyer, that is, the acquiring company buys the target for its strategic interest involving innovative products, intellectual property, synergies or expecting a greater competitive advantage and increased market share in its respective industry. In the hope of a more effective operating cash flow from the target in the future, the buyer often consents to pay the value of strategic options included in the target price, paying a higher present value for it. As a result, the strategic sale typically fetches the greatest price for the target's equity. For these reasons, a PE Firm’s preferred exit strategy is M&A route. Unlike IPO1, M&A exit doesn't have any lock-in-period, thereby attaining the immediate cash in return2. And these returns are subject to be taxed under Income Tax Act, 1961.

However, most of the times, the exit transactions involve cross-border mergers where Indian Company’s equities get by foreign companies. As, a result of involving cross-border elements, a complex legal and tax framework is introduced. Taxability on such transactions is a significant issue in these exits, when shares of Indian companies are held through offshore companies in tax-free jurisdictions like Mauritius or Singapore. Considering that tax treaty structures are primarily intended to reduce capital gains tax, Indian tax authorities are become more concerned about possible exploitation of these agreements or treaties. To determine how recent regulatory changes will affect upcoming cross-border deals, this research article analysis explores India's M&A legal framework, looks at the tax implications of private equity exits, and assesses significant court decisions.

1 FinLead, Exit Strategies in Private Equity: IPO, M&A, and Beyond (2025)

2 Vivek Pandit, Toshan Tamhane & Rohit Kapur, Indian Private Equity: Route to Resurgence, McKinsey & Co. (June 2015)

INDIAN LEGAL FRAMEWORK FOR M&A

The key laws that govern M&A transactions in India are the Companies Act 2013, the Competition Act 2002, the Foreign Exchange Management Act, and the SEBI regulations. Because M&A transactions require careful planning and execution in accordance with stringent regulations and compliance, the structure established by these laws has a significant impact on M&A activities. Primary legislation governing corporate activities such as mergers, and amalgamations is the Companies Act 2013. The Act has been amended several times to reduce the compliance burden with certain provisions, particularly from sections 230 to 2403 in terms of mergers and amalgamations transactions, allowing for accessible and compliant restructuring procedures.

It covers essential compliance requirements, including obtaining shareholders' approval, getting approval from the National Company Law Tribunal (NCLT) for some transactions, and filing the necessary documents to the Registrar of Companies (ROC). Companies Act governs only the transactions in nature of Mergers and Amalgamations and not the Acquisitions. Only the Competition Act 2002 deals with various combinations, including acquisitions, mergers, and amalgamations, which are covered in Section 5 and Section 64 of the Competition Act 2002. Preventing anti-competitive practices and protecting consumer interests are the goals of the Competition Act 2002. Mergers and acquisitions that have a major effect on market competition require approval from the Competition Commission of India (CCI). SEBI regulations are essential for ensuring accountability and transparency for listed companies.

Before moving forward with an M&A transaction, these regulations require public disclosures, the submission of offer documents, and, in certain situations, SEBI's approval is needed. Investments made in India by the investors of foreign countries are subject to the Foreign Exchange Management Act (FEMA) 19959 and calls for prior Reserve Bank of India (RBI) approval as well as adherence to reporting regulations. This law keeps an eye on the flow of foreign funds into and out of the nation.

3 Companies Act, No. 18 of 2013, §230 - §240, (2013).

4 Competition Act, No. 12 of 2003, §5, §6 (2003).

5 Foreign Exchange Management Act, No. 42 of (1999).

TAX IMPLICATIONS ON PRIVATE EQUITY EXIT THROUGH M&A ROUTE

Once the deal between the Private Equity Firm and the Acquiring Company or the Strategic Buyer is executed, the resulting return or profit earned by the Private Equity Firm will be taxable under the Income Tax Act, 1961. Private equity (PE) funds often classify income from the sale of securities as capital gains rather than the head of profit or gains from business or profession (PGPB), as capital gains are taxed at a lower rate, compared to PGBP. But establishing whether the income from such transaction is Capital Gains or PGPB has always been a challenging subject, with tax authorities depending on subjective criteria, causing uncertainty for Private Equity (PE) entities. Indian tax authorities released Tax Circulars6 to provide precise guidelines for classifying income from share sales after a lengthy litigation battle.

These circulars state that if listed shares are held for a minimum of 12 months prior to being sold, the proceeds from their sale are considered capital gains. However, in case of unlisted company shares, it will be classified under the head “Capital Gains”. Here the holding period is no matter to be considered. In some cases, when the sale results in the transfer of management and control of the underlying business, when the validity of the transaction is questioned, and when issues with lifting the corporate veil come up, or, tax officers may have the discretion to classify income from the sale of private company shares as PGPB rather than income from capital gains.

By giving tax officers extensive power to contest classifications on the basis of subjectivity like "genuineness" or corporate veil concerns of such transactions, the Tax Circulars may unintentionally increase uncertainty even though they were intended to bring clarity. Considering the lack of clarity on the definition of "control" itself, these regulations may therefore give rise to new disputes, which would specifically affect private equity (PE) funds involved in control transactions.

ANALYSIS

In 2022, Income Tax Dept. of India issued a demand of tax7 over five hundred crores (in rupees) 6 Vijay Sambamurthi, Recent Developments in Indian Law: Impact on Private Equity Transactions, 28 Nat’l L. Sch. India Rev. 1 (2016), 7 Sunainaa Chadha, Explained: How India's Taxmen Are Chasing Global PE Funds for Misusing Tax Treaties to Evade Capital Gains Tax, Times of India (Apr. 8, 2022)

against many venture capital (VC) groups and global private equity (PE) firms for allegedly using tax treaties with Mauritius, Singapore, and Cyprus to underreport income and escape capital gains tax. In general, these organizations typically invest directly in India or indirectly through Special Purpose Vehicles positioned in countries with beneficial tax laws, like Mauritius. Cross-border transactions are excluded from capital gains tax, subject to the restrictions outlined in Section 47 of Income Tax Act 1961, as well as any Double Tax Avoidance Agreements (DTAA) or Bilateral Investment Treaties (BITs) agreed into with the other country. While indirect investments through SPVs involve offshore share transfers, avoiding tax obligations, whereas direct investments are subject to capital gains tax in India.

Capital gains exemptions were made possible by the India–Mauritius and India–Singapore Double Taxation Avoidance Agreements (DTAA), especially for investments made prior to

2017. Mauritius is a preferred investment destination because it does not impose local capital

gains tax. But, Indian tax authorities argues that these routes are commonly abused for treaty shopping, in which companies without actual local operations take advantage of treaty benefits meant for domestic investors. With support of OECD guidelines on treaty abuse and evolving international tax laws, Indian tax authorities now reject legitimate Tax Residency Certificates if they suspect that the investors are taking advantage of tax beneficial treaties. A major issue is that, while funds appear to be based in Mauritius or Singapore, they are frequently owned and managed by corporations in the United States or Europe, thus serving as routes or pipelines for investments. In 2024, the Delhi High Court rendered a landmark decision in the Tiger Global International v.

Income Tax Department8 case, upholding treaty benefits under the India– Mauritius DTAA and highlighting that, in accordance with Article 13(3A), a valid Tax Residency Certificate (TRC) is sufficient to claim capital gains tax exemption for investments made prior to 01. 04. 2017. After Investing in Flipkart Singapore, Tiger Global, a Mauritiusbased Private Equity firm, exited its position through M&A route by selling its shares to a Luxembourg company. Although the Advance Authority Ruling (AAR) initially rejected treaty benefits, claiming that the entity was controlled by its US-based investment manager and lacked commercial substance, the Delhi High Court disagreed, holding that Tiger

8 Tiger Global International III Holdings v. Authority for Advance Rulings, (2024) 468 ITR 405

Global was only a service provider and neither the beneficial owner nor the controlling entity. The court further affirmed that the Mauritian board of Tiger Global had actual decisionmaking power. The Court further declared that establishing investment vehicles in tax-friendly jurisdictions is not always abusive and reiterated that treaty benefits cannot be withheld on the basis of unclear suspicion or arguments based on retrospective control, particularly in cases where grandfathered investments prevent GAAR provisions from applying. It underlined that strong evidence, not just structural planning, is needed to pierce the corporate veil and that treaty provisions supersede domestic tax laws. Also, the court made it clear that the rule of “Limitation of Benefit” won’t apply to investments made before 2017 under the Mauritius DTAA, unlike the Singapore DTAA.

In the case of Blackstone Capital Partners (Singapore) VI FDI Three Pte Ltd v. ACIT9, Blackstone's Singapore-based subsidiary sold shares of an Indian company purchased prior to 1. 04. 2017, making the transaction grandfathered under the treaty. Indian tax officials, however, attempted to reject the exemption, claiming that Blackstone Singapore was not the "beneficial owner" of the profits. The Court rejected this argument, holding that beneficial ownership cannot be inferred, if it not clearly stated in the treaty. Instead of retroactively applying domestic tax concepts like beneficial ownership or anti-avoidance rules that are not included in the treaty, the Court held that treaty interpretation must respect the negotiated agreement between countries in line to good faith principles.

The ruling upheld predictability in tax outcomes for foreign investors, especially in cases where treaty carve-outs protect investments, citing CBDT circulars.

CONCLUSION AND RECOMMENDATIONS

As we witnessed, M&A route being the most favoured strategic exit route for Private Equity (PE) firms, strategic planning must go beyond business considerations. PE firms should also consider careful tax planning and legal structuring to mitigate risks that may arise after the transaction. Because the real complexity arises when the tax implications on cross-border transaction of exit proceeds. Like we see in the above-mentioned cases, such as Tiger Global

9 Blackstone Capital Partners v. Asst. CIT, (2023) 452 ITR 111

and Black Stone litigation battle, subjective decision or orders of the Tax Authorities and the categorization of returns from such exit route as either PGPB or Capital Gains continues to a controversial issue. These uncertainties make the PE firms, very difficult to predict the tax liabilities on such cross-border M&A route exit transaction. At the same time, the courts have also clarified that the legitimate investments made in tax havens cannot always be assumed to be exploitation of treaties. And also, the courts reaffirmed the need to the need to interpret treaties in line with the mutual respect and good faith principles of contracting states, without introducing anti-avoidance clauses of the domestic laws that are not expressly stated in the treaty.

The article formulates three key recommendations on balancing the interests of both PE Firms and the Domestic Country: • The Central Board of Direct Taxes (CBDT) should draw a line between the heads of Capital Gains and Profit or Gains from Business or Profession (PGPB) and issue clear guidelines in the context of PE Exit transactions through M&A route. This will result in reducing the litigation battles. • All the PE firms must maintain clear and legitimate documents to attain treaty benefits and claims on exemptions. This ensures that the tax planning is in line with Indian Taxation Policies. • There should be better coordination among the regulatory authorities such as Income Tax Department, SEBI and RBI. This results in eliminating regulatory arbitrage and will ease the compliance burden.

REFERENCES AND BIBLIOGRAPHY

RESEARCH ARTICLES

Tarun Jain, Steering Influence of Tax Laws over M&A Transactions: Reflections on Changing Landscape in India, I HPNLU JTL 37 (2022). • Mark Humphery‐Jenner, Zacharias Sautner & Jo‐Ann Suchard, Cross‐Border Mergers and Acquisitions: The Role of Private Equity Firms, 38 Strategic Mgmt. J. 1688 (2017). • Didier Folus & Emmanuel Boutron, Exit Strategies in Private Equity, in Private Equity: Opportunities and Risks 215 (2015). • Vivek Pandit, Toshan Tamhane & Rohit Kapur, Indian Private Equity: Route to Resurgence, McKinsey & Co. (June 2015), https://www.mckinsey.com/~/media/mckinsey/business%20functions/strategy%20and %20corporate%20finance/our%20insights/private%20equity%20and%20indias%20ec onomic%20development/mckinsey_indian_private%20equity.pdf. • Vijay Sambamurthi, Recent Developments in Indian Law: Impact on Private Equity Transactions, Nat’l

L.

Sch. India Rev. (2016), https://repository.nls.ac.in/cgi/viewcontent.cgi?article=1137&context=nlsir. • Kshitija Joshi & Deepak Chandrashekar, IPO/M&A Exits by Venture Capital in India: Do Agency Risks Matter?, 7 Asian J. Innovation & Pol’y 534 (2018), https://accesson.kr/ajip/assets/pdf/42508/journal-7-3-534.pdf. • White & Case LLP, Eyes on the Exit: Selling PE Portfolio Companies in Complex Markets, White & Case (Mar. 19, 2025), https://www.whitecase.com/insightourthinking/eyes-exit-selling-pe-portfolio-companies-complex-markets. • Nivas Gunda, Private Equity’s Expanding Role in Middle Market Mergers & Acquisitions, TaxGuru (Nov. 10, 2024), https://taxguru.in/corporatelaw/privateequitys-expanding-role-middle-market-mergers-acquisitions.html.

Anjali Darak, Tax Implications of Mergers and Acquisitions (M&A), UJA Taxation Times (Jan. 5, 2025), https://uja. in/blog/taxation-times/tax-implications-ofmergersand-acquisitions-ma/. • Ashish Sodhani & Ipsita Agarwalla, Tax Issues in M&A Transactions, Nishith Desai Assocs. (May 2022), https://www. nishithdesai. com/fileadmin/user_upload/pdfs/Research_Papers/Tax_Issue s_in_M_A. pdf. • Dhruva Advisors LLP, M&A in India – Tax and Regulatory Perspective (Nov. 2023), https://www. dhruvaadvisors. com/wp-content/uploads/2023/11/MnA-in-India-Taxand- Regulatory-Perspective. pdf. • ASA & Assocs. , Key Tax Considerations in a Cross-Border Acquisition (Oct. 2024), https://www. asa. in/wp-content/uploads/2024/10/ENKey-Tax-considerations-inacross-border-acquisition. pdf • PricewaterhouseCoopers, Global M&A Industry Trends: 2025 Outlook (Feb. 2025), https://www. pwc. com/gx/en/services/deals/trends.

html#geopolitics-accordiontradepolicy-and-tariffs-could-spark-inflation. • Tax Planning for Mergers & Acquisitions: A PKC Guide, PKC India (Oct. 2024), https://pkcindia. com/blogs/tax-planning-for-mergers-and-acquisitions/. • Radhika Agarwal & Sharad Moudgal, In Brief: Acquisition and Exit Strategies for Private Equity Firms in India, Lexology (Mar. 9, 2024), https://www. lexology. com/library/detail. aspx? g=82ed44a9-0246-4bea- 99022bee6243ca33. • PricewaterhouseCoopers, Capital Considerations: Private Equity Exit Drought, PwC (Feb. 2025), https://www. pwc. com/us/en/services/consulting/deals/library/capitalconsiderationsprivate-equity-exit-drought. html.

FinLead, Exit Strategies in Private Equity: IPO, M&A, and Beyond (2025), https://www.finlead.in/blog/exit-strategies-in-private-equity-ipo-m-a-and-beyond.

JOURNALS

Indian High Court Ruling Gives Certainty to Foreign Investors, AZB & Partners (Mar. 28, 2023), https://www. azbpartners. com/bank/indian-high-court-ruling-givescertaintyto-foreign-investors/. • Mukund Madhusudhan, Blackstone Decision and Mauritius PPT – Dividend Perspective! , Taxsutra (June 16, 2024), https://database. taxsutra. com/articles/2085cb1c41031e387a364a137cc60f/expert_artic le. • S. R. Patnaik, Thangadurai V. P. & Rhea Prasad, Delhi High Court Grants Tax-Treaty Benefits to Tiger Global’s Flipkart Exit, Cyril Amarchand Mangaldas: India Tax Law Blog (Sept. 4, 2024), https://tax. cyrilamarchandblogs. com/2024/09/delhi-highcourtgrants-tax-treaty-benefits-to-tiger-globals-flipkart-exit/. • Sunainaa Chadha, Explained: How India's Taxmen Are Chasing Global PE Funds for Misusing Tax Treaties to Evade Capital Gains Tax, Times of India (Apr. 8, 2022), https://timesofindia. indiatimes.

com/business/india-business/explained-howindiastaxmen-are-chasing-global-pe-funds-for-misusing-tax-treaties-to-evade-capitalgainstax/articleshow/90723571. cms.

CASES

Tiger Global International III Holdings v. Authority for Advance Rulings, (2024) 468

ITR 405

Blackstone Capital Partners v. Asst. CIT, (2023) 452 ITR 111