The Income Tax Department has raised objections to the tax treaty benefits claimed by the Singapore-based arm of global trading firm Jane Street, invoking provisions under the Multilateral Instrument (MLI) in a draft assessment order issued in mid-March.

The draft order pertains to the financial year 2023–24 and involves alleged escaped income of approximately ₹8,000 crore. Authorities have reportedly applied the Principal Purpose Test (PPT) clause under the India–Singapore tax treaty, which allows denial of treaty benefits if it is concluded that obtaining such benefits was one of the principal purposes of an arrangement.

Under the India–Singapore agreement, foreign portfolio investors (FPIs) based in Singapore are typically exempt from tax on derivative profits arising from trading in listed equity futures and options. However, the tax department appears to have questioned whether the structure used by the firm was primarily designed to avail these treaty benefits.

Jane Street operates through multiple international entities, including FPIs in Singapore and Hong Kong, along with subsidiaries in India. While India has a tax treaty with Hong Kong, it differs from the Singapore agreement in that Hong Kong-based FPIs are required to pay tax on derivative gains.

According to regulatory findings, the firm allegedly used its Indian entities to take positions in cash and stock futures markets, while its Singapore and Hong Kong arms engaged in large positions in equity options. A significant portion of the profits was reportedly recorded in the Singapore entity, which did not incur tax on such earnings under the treaty.

Earlier investigations into the firm’s activities included scrutiny of its financial records and interactions with its officials. These inquiries led to recommendations for invoking anti-avoidance provisions. While General Anti-Avoidance Rules (GAAR) were considered, the assessing officer is understood to have relied instead on the broader provisions of the MLI.

Unlike GAAR, which targets arrangements primarily designed for tax avoidance, the MLI framework can be applied even if tax benefit is one of the key purposes among others. This expands the scope for denying treaty advantages in complex cross-border structures.

The department is also examining whether the Singapore entity had sufficient commercial substance or whether it functioned largely as a conduit. Questions have been raised about the actual location of decision-making and operational control, including whether key personnel were based outside Singapore.

The matter may proceed to the Dispute Resolution Panel (DRP) if the taxpayer contests the draft order. Alternatively, it could move through the appellate route, beginning with the Commissioner of Income Tax (Appeals).

The case highlights increased scrutiny by tax authorities on cross-border arrangements and treaty claims, particularly in light of global efforts to curb base erosion and profit shifting through instruments like the MLI.

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