Singapore Goes The Mauritius Route, Loses Right To Tax Equity Capital Gains Arising In India
India-Singapore double taxation avoidance treaty amended.
Starting April 1, 2017, India will have the right to tax capital gains arising on Indian equity shares sold by a Singapore resident. The governments of India and Singapore have amended the double taxation avoidance treaty between the two countries, in line with the changes India recently made to a similar treaty with Mauritius.
The Third Protocol
What that means is – effective April 1, 2017 when a Singapore resident sells Indian equity shares, acquired on or after April 1, 2017, the capital gains arising on such a transaction will be taxable in India.
The capital gains tax rate applicable will be 50 percent of the prevailing rate in India if the equity shares acquired on or after April 1, 2017, are sold before April 1, 2019.
This lower rate will apply only to those residents who meet the criteria set out in the treaty’s Limitation of Benefits clause, to identify bona fide Singapore tax residents.
For Indian equity shares acquired on or after April 1, 2017, and sold on or after April 1, 2019, the gains will be taxed at the rate then prevailing in India.
There is no change or impact on equity shares acquired before April 1, 2017 as both governments agreed to grandfather such investments irrespective of when they are sold or transferred. But, like in the past, this grandfathering or exemption from tax will be subject to the Singapore resident meeting the criteria set out in the Limitation of Benefits clause in the treaty.
A media statement issued by the Finance Ministry said the changes to the India-Singapore treaty, made via the Third Protocol, are “in line with India’s treaty policy to prevent double non-taxation, curb revenue loss and check the menace of black money through automatic exchange of information, as reflected in India’s recently revised treaties with Mauritius and Cyprus and the joint declaration signed with Switzerland”.
The media statement also lists amendments that will impact transfer pricing matters between the two countries and their residents.
The Third Protocol also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases. 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 Third Protocol also enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion.Finance Ministry Statement (December 30)
Awaiting Clarity
The changes to the India-Mauritius double tax avoidance treaty made in May 2016 also include the levy by India of
- not more than 7.5 percent tax on interest arising in India and paid to a Mauritius resident
- not more than 10 percent tax on fees for technical services arising in India and paid to a Mauritius resident
- income not expressly dealt with under the treaty will be taxable in the country in which the income arises
It is not clear if the same changes will also apply to the Singapore treaty. The Finance Ministry statement is silent on these.
KPMG’s head of tax, Girish Vanvari says he’s pleasantly surprised.
We were expecting the changes to be on the lines of the Cyprus treaty amendments (no discounted tax rate for the first two years), resulting in Mauritius having an advantage over Singapore. So it’s good news that the treaty provisions with Singapore and Mauritius are now the same. We are awaiting clarity on whether the Singapore treaty will also be amended to levy an up to 7.5 percent tax on interest payments as has been provided in the Mauritius treaty.Girish Vanvari, Partner and Head - Tax, KPMG
The Back Story
The India-Singapore double tax avoidance treaty was signed on May 27, 1994. But it was the Comprehensive Economic Cooperation Agreement (CECA) signed between the two countries in 2005 and an accompanying protocol that gave Singapore the right to tax capital gains on the sale of Indian equity shares by a Singapore resident, similar to the agreement between India and Mauritius and linked to it.
India Singapore Protocol (July 2005)
Articles 1, 2, 3 and 5 of this Protocol shall remain in force so long as any Convention or Agreement for the Avoidance of Double Taxation between the Government of the Republic of India and the Government of Mauritius provides that any gains from the alienation of shares in any company which is a resident of a Contracting State shall be taxable only in the Contracting State in which the alienator is a resident.
The Second Protocol included a Limitation of Benefits clause or safeguards to ensure the exemption from Indian capital gains tax was available only to Singapore residents meeting certain criteria, such as those listed on a recognised stock exchange in Singapore or those with a total annual expenditure of Singapore $200,000 or more in the two years before the gains arise.
Since Singapore, like Mauritius, does not tax capital gains on equity shares and the LoB clause resulted in the Singapore route being less litigious than the Mauritius one, several foreign investors in India chose to be situated out of Singapore. Over time the Indian government claimed this led to a substantial revenue loss for the country.
In May 2016 the Mauritius treaty was reworked and the government then said it would renegotiate the Singapore treaty as well.