The Artful Dodger in Jane Street may now run into a GAAR Net

GAAR : General Anti Avoidance Rules

GAAR is a system to prevent tax evasion under SEBI. The General Anti Avoidance Rule (GAAR) in India aims to stop businesses and individuals from finding ways to pay less tax by exploiting loopholes or using aggressive tax avoidance strategies. GAAR refers to a regulatory scheme under the Income Tax Act created to mitigate aggressive tax evasion techniques. It functions as a shield preventing individuals or companies from using legal gaps to dodge paying their just proportion of taxes. This framework targets transactions or business arrangements specifically structured with the primary intent of tax avoidance.

Overview of Jane Street:

India Market faced an overall downfall of Rs. 5000 Cr due to a company named Jane Street. SEBI has mentioned the company for the market manipulation and the strategy followed was:

• PUMP – Create artificial pressure
• DUMP – Reverse the pressure
• PROFIT – Benefit via Derivatives Exposure.

Which happened through one of India’s trusted volatile index : NIFTYBANK.

The company was well recognised in the industry offering crores of package to our smartest minds including IIT passout, had provided employment to 2500+ employees in 40+ countries and few years before entered the Indian Options Market. The company earned INR 1 Billion Dollars by 2023, INR 2 Billion Dollars by 2024, through a secret strategy.

The interesting part is the secret strategy came out during legal proceedings in the court between two countries.

Jane Street vs Millennium

Which caught the attention of Securities and Exchange Board of India (SEBI). SEBI started investigating at this secret strategy of SEBI and opened every trade that Jane Street performed from January 2023 to March 2025.

1. Intraday Index Manipulation

This Index was launched in 2003 to check the financial health of our banking sector. And as per SEBI Report, Jane Street had manipulated the same Index.

Extended Marking the Close

Extended Marking the Close (EMTC) is a term SEBI used to describe a pattern of trading near the market close, where a participant allegedly influences the closing price of an index or its constituents over an extended window — not just the final minute.

“Extended Marking the Close” refers to SEBI’s allegation that Jane Street influenced index closing prices by placing large, sustained trades near market close—especially on expiry days—to benefit derivative positions linked to those closing values.

On July 3, 2025, India’s markets regulator SEBI issued an interim order against U.S.-based proprietary trading firm Jane Street, alleging market manipulation in the Indian index derivatives market — particularly Bank Nifty expiry-day trades. SEBI barred Jane Street from accessing Indian securities markets, meaning it could not buy, sell, or deal in securities directly or indirectly. SEBI froze and ordered disgorgement of ~₹4,843 crore (~$560m) — characterised by the regulator as “unlawful gains” made through alleged manipulative trading patterns.

The order was interim and designed to protect market integrity while investigation and adjudication continue.

Jane Street disputed SEBI’s allegations, maintaining that its trading strategies were legitimate arbitrage and standard high-frequency operations. As required by SEBI’s order, Jane Street deposited ~₹4,843 crore into an escrow account in India to comply with the interim order.

After depositing the escrow amount, Jane Street can operate again under SEBI supervision, but its future involvement will depend on ongoing legal/regulatory developments and its own strategic decisions. SEBI’s broader crackdown influenced tighter oversight on algorithmic and derivatives trading for foreign firms, signalling a more stringent regulatory environment for such participants in India.

Possible GAAR Triggers in the Jane Street Structure

1. Artificial Segregation of Trading Functions

Authorities suspect that Indian entities executed trades, while profits were recorded in offshore FPIs, raising questions about whether the structure had real commercial substance.

If the Indian arms were essentially performing the trading activity, the tax department could conclude that the profits actually arose in India.

GAAR allows the tax authorities to look through such arrangements.

2. Treaty Shopping Through Singapore Entities

The India–Singapore tax treaty historically allowed capital gains from certain derivatives to escape taxation in Singapore.

However, GAAR enables authorities to override treaty benefits if the principal purpose of the structure was to obtain the treaty advantage.

Therefore, even if the treaty technically applies, GAAR may deny the exemption.

3. Mirror or Coordinated Trading

Investigations suggest that multiple entities within the Jane Street group may have taken coordinated positions across markets.

If profits were systematically directed toward entities enjoying treaty benefits, tax authorities could interpret this as a profit-allocation strategy lacking commercial substance.

Such arrangements are classic triggers for GAAR scrutiny.

Potential Tax Consequences if GAAR Is Invoked

If GAAR is applied successfully, the tax department could undertake several corrective measures.

1. Re-attribution of Income to India

The authorities could reallocate profits booked in offshore entities to the Indian trading operations. This would make the income taxable in India.

2. Denial of DTAA Benefits

GAAR overrides tax treaties in cases of abusive arrangements. Consequently, the India–Singapore DTAA benefit could be denied, leading to full taxation of the gains in India.

3. Reclassification of Income

Another issue is how the income is characterized.

Instead of capital gains, authorities may treat the profits as:

• Business income, or
• Unexplained income

This classification could significantly increase tax liability.

4. Higher Effective Tax Rate

If the profits are attributed to Indian entities, the effective tax rate could rise to around 38% including surcharge and cess.

Given the alleged profits exceeding ₹36,000 crore, the potential tax demand could be enormous.

Additional Issue: Permanent Establishment (PE)

Apart from GAAR, authorities are examining whether the offshore entities effectively had a Permanent Establishment (PE) in India.

If the Indian subsidiaries functioned as dependent agents executing trades under centralized control, the offshore profits could still be taxed in India under PE rules.

Thus, GAAR and PE doctrines may operate together.

Broader Implications for Global Trading Firms

The outcome of the Jane Street case could have far-reaching consequences.

1. Increased Scrutiny of FPI Structures

Foreign trading firms using offshore vehicles to access Indian markets may face deeper tax scrutiny.

2. Treaty Benefit Challenges

Tax authorities may increasingly use GAAR to challenge treaty-based tax planning, particularly in derivatives trading.

3. Regulatory Coordination

The case represents regulatory convergence between:

• Market regulation by Securities and Exchange Board of India
• Tax enforcement by the Income Tax Department

Conclusion:

The Jane Street case marks a turning point in how Indian regulators view large, algorithm-driven trading in derivatives markets. The issue is not just the size of alleged gains, but how short-term price influence can shape outcomes on critical expiry days. As global firms deploy increasingly complex strategies, SEBI’s intervention signals a push to strengthen market discipline, reinforce fair price discovery, and ensure that speed and capital do not overpower market integrity. The long-term health of India’s markets will depend on how effectively oversight keeps pace with innovation.

The Jane Street episode also illustrates the growing willingness of Indian regulators to pierce complex cross-border trading structures. If GAAR is invoked, the case could become one of the largest tax avoidance disputes involving a foreign trading firm in India. For global proprietary trading firms, the message is clear: structures designed primarily for tax efficiency rather than economic substance may not withstand GAAR scrutiny.

In that sense, the “artful dodger” strategy of routing profits offshore may now face its toughest test in India’s evolving anti-avoidance regime.