Putting to rest the speculation surrounding the Double Taxation Avoidance Agreement (DTAA) with Singapore, the Government of India has finally announced that it has been revised. This announcement was made on December 30, 2016, and the text of the new protocol amending the India-Singapore DTAA (Protocol) has since been made available. The Protocol is along expected lines on the taxation of capital gains front. But, surprisingly, it has not granted incentives on taxation of interest income and Singapore based investors would be at a significant disadvantage as compared to Mauritius based investors.
KEY REVISIONS TO THE DTAA
- The Protocol, in consonance with the amended India-Mauritius DTAA, proposes to grant India the right to tax capital gains arising to a Singapore entity from the alienation of shares of an Indian company. Prior to the Protocol, India did not have the right to tax such capital gains arising to a Singapore resident.
- In order to ensure a smooth transition and to provide the investor adequate notice, the Protocol provides that the investments made prior to April 01, 2017 would be grandfathered. In addition, the Protocol also provides that capital gains earned by Singapore residents during the transition period (from April 01, 2017 to March 31, 2019), would be taxed at half the applicable rate, subject to fulfilment of the conditions prescribed under the Limitation of Benefits (LoB) clause.
- In line with the amended India-Mauritius DTAA, the LoB clause provides that the benefit of the concessional tax regime during the transitional period would not be available where the affairs of an entity are arranged with the primary purpose of taking advantage of the said benefits and such entity is a shell/conduit company.The Protocol further clarifies that a resident of India or Singapore shall be deemed to be a shell or conduit company if its annual expenditure is less than INR 5,000,000 or Singapore $200,000 respectively: (a) where the capital gains benefit is claimed, for each of the 12-month periods in the immediately preceding period of 24 months from the date on which the gains arise; and (b) where benefit of the concessional tax regime is claimed (during the transitional period), for the immediately preceding period of 12 months from the date on which the gains arise.
- The Protocol also proposes to amend Article 9 of the India-Singapore DTAA dealing with transactions between associated enterprises and enables consultation between competent authorities of both the contracting states to determine transfer pricing adjustments. This amendment comes in pursuance of India’s commitments under the Base Erosion and Profit Shifting (BEPS) Action Plans to meet the ‘minimum standards’ of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases.This amendment is also likely to further facilitate the MAP process under the India-Singapore DTAA and could encourage taxpayers in both India and Singapore to approach the concerned authorities for bilateral Advance Pricing Agreements (APAs). This would go a long way in avoiding unnecessary, time consuming and expensive litigation processes. It may be pertinent to note that a similar amendment is absent in the revised DTAA with Mauritius.
- The Protocol provides that the India-Singapore DTAA will not prevent the contracting States from applying domestic law and measures concerning prevention of tax avoidance or tax evasion.
- The Protocol will come into force after it is notified by India and Singapore, after completion of respective procedures. From an India perspective, if the Protocol is not notified on or before March 31, 2017, on account of pending processes, it will automatically come into force on April 1, 2017.
IMPACT ON INVESTORS
The revised India – Singapore DTAA may have a detrimental impact on the volume of investments into India through Singapore. Singapore may no longer be an attractive jurisdiction for private equity and venture capital investors to route their investments.
However, Foreign Portfolio Investors investing in India in listed securities, participatory notes, etc. may not be affected by the amended DTAA, since capital gains earned from the sale of investments held for more than 12-months will continue to be non-taxable in India.
While the tax advantage may have been lost, India is expected to retain her attractiveness as one of the fastest growing major developing countries and in spite of the imposition of capital gains tax, could still provide attractive returns to investors. Thus, India may still remain a favourite investment jurisdiction for foreign investors because they could still earn a higher post tax return in India as compared to other jurisdictions.
The Protocol confirms the tax treatment of capital gains under the India – Singapore DTAA which has been under some cloud after the amendment of the India-Mauritius DTAA. This Protocol is yet another strong step taken by the Government of India to prevent treaty shopping, base erosion and profit shifting. As the DTAAs with Mauritius, Cyprus and Singapore have now been revised, it is expected that similar amendments may now be brought in the India-Netherlands DTAA as it continues to provide a beneficial tax treatment of capital gains.
Pursuant to these revisions to the DTAAs, foreign investors do not have to route their investments through a jurisdiction only to claim some concessional tax treatment and all investors shall be treated at par. This will provide certainty and predictability regarding the tax treatment of income earned by foreign investors and is expected to enhance India’s position as a favoured investment destination.