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India-Singapore Sign Revised Pact on DTAA
Jan 04, 2017

India recently signed a pact with Singapore to amend a decade-old treaty to begin taxing capital gains on investments routed through the South East Asian nation. With the signing of the amended tax treaty, the government had closed all three channels—Mauritius, Cyprus and Singapore, from where domestic black money was flown out and then routed back to the country using these tax treaties. 

Key Features

  • Double Taxation Avoidance Agreements (DTAA) with Singapore, Cyprus and Mauritius, the government has blocked round-tripping of money or domestic black money being taken out and re-routed via these countries as legitimate investments without paying any taxes. 
  • After amending its tax treaties with Mauritius and Cyprus earlier this year, India revised its Double Taxation Avoidance Agreement (DTAA) with Singapore enabling India to tax capital gains of Singapore-based investors transacting in Indian securities from April 1, 2017. 
  • For first two years, India and Singapore will share the taxes on such gains equally and from third year onwards, all such taxes will accrue to India.
  • In line with the changes in the earlier revised treaties with the other two nations, India and Singapore have amended the Third Protocol of the India-Singapore DTAA with effect from April 1, 2017 to provide for source-based taxation of capital gains arising from transfer of shares in a company as against residence-based taxation of capital gains at present
  • As per the revised DTAA, investments in shares made before April 1, 2017 have been grandfathered subject to fulfillment of conditions in Limitation of Benefits (LoB) clause.
  • Also, a two-year transition period from April 1, 2017 to March 31, 2019 has been provided during which capital gains on shares will be taxed in source country at half of normal tax rate, subject to conditions in the LoB clause.
  • The Third Protocol also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases.
  • The Third Protocol also enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion.

There was a reasonable apprehension that these (double taxation) agreements were being used for round tripping of domestic black money organising its flight outside the country and bringing it back into the country through these three routes.
The revisiting of these arrangements was extremely important and along with the battle of black money that is being fought currently in India.

The revised protocol released by Singapore’s Ministry of Finance did not have mention of tax treatment of debt instruments. Since interest income on debt instruments currently attracts 15 per cent withholding tax in Singapore in contrast to 7.5 per cent in Mauritius, this gap may create an arbitrage.

If the concessional rate of 7.5 per cent on interest withholding which is there under the revised Mauritius tax treaty is not extended to Singapore, then it could have an impact on debt funds with investors likely to show a preference to the Mauritius route for debt investment. For equity, Singapore may have an edge as funds and investors have a substance in comparison with Mauritius investors.

While gains on sale of shares held for less than 12 months are treated as short-term capital gains and attract a 15 per cent short-term capital gains tax, the gains on sale of shares after holding for 12 months are treated as Long-Term Capital Gains (LTCG) and, currently, attract zero tax.

This is a taxpayer friendly measure and is in line with India’s commitments under Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases. 

The government had earlier in May 2016 revised its DTAA with Mauritius, triggering a change in the DTAA with Singapore. Mauritius and Singapore are among the top sources of foreign direct investments into India. 

It is worth mentioning here that from 2019, Switzerland will start sharing information on money parked in that country. It will now be possible for India to receive from September 2019 onwards, the financial information of accounts held by Indian residents in Switzerland for 2018 and subsequent years, on an automatic basis.


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