By: Ramesh Vaidyanathan and Riya Dutta
In yet another move to combat tax evasion, India has signed the protocol (“Protocol”) for amending the India-Singapore Double Taxation Avoidance Agreement (“India-Singapore DTAA”) on December 30, 2016. India has thus gained the taxation rights on capital gains of a Singapore tax resident arising on sale of shares of an Indian company. The amendments made to the India-Singapore DTAA are in line with the amendments made early last year to the India-Mauritius Double Taxation Avoidance Agreement (“India-Mauritius DTAA”).
The India-Singapore DTAA did not allow India to impose capital gains tax on Singapore tax residents investing in shares of companies resident in India as it provided for residence-based taxation regime.
Singapore as also Mauritius and Cyprus do not levy capital gains tax, making these three countries the most preferred destinations for routing investments into India.
With effect from April 1, 2017, the capital gains arising on a transaction involving sale of shares acquired on or after April 1, 2017 by a Singapore tax resident will be taxable in India.
Co-terminus with Mauritius Treaty:
India has already amended the India-Mauritius DTAA in May last year to provide the right to tax capital gains arising on sale by Mauritius tax residents of shares of companies resident in India after April 1, 2017. The India-Singapore DTAA being co-terminus with the India-Mauritius DTAA, it was expected that the Indian Government would come up with a similar amendment to the India-Singapore DTAA.
Moving away from the residence-based tax regime of capital gains on shares, the key features of the Protocol that will significantly impact investments routed through Singapore are as follows:
Levy of capital gains tax:
India gets the right to impose capital gains tax arising on the transfer of shares of a company resident in India by a Singapore tax resident if these shares are acquired on or after April 1, 2017.
Source based taxation regime:
The protocol allows for source-based taxation of capital gains arising from transfer of shares acquired on or after April 1, 2017 in a company resident in India. Therefore, source-based taxation gives the right to India to levy capital gains tax as the income arises in India.
Applies only to shares:
The Protocol applies only to investments in shares. Therefore, investors resident in Singapore investing in convertible and non-convertible debentures or any other securities other than “shares” shall continue to remain outside the purview of this Protocol. However, on conversion of their convertible instruments to shares, the exemption shall cease to exist with effect from the date of conversion of such securities to shares. The date of conversion will be considered as the date of acquisition of the shares for the purpose of calculation of capital gains tax.
Reduced tax rate for the transitional phase:
Capital gains tax rate applicable to the Singapore tax residents will be 50% of the prevailing domestic tax rate if the shares are acquired on or after April 1, 2017 and are sold before April 1, 2019. However, this will apply to bonafide entities and individuals who satisfy the conditions set out in the Limitation of Benefits clause of the India-Singapore DTAA. Investors shall be taxed at the full domestic tax rate post March 31, 2019.
For 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.
No retrospective application:
Investments in shares acquired before April 1, 2017 are grandfathered to the extent that they will continue to enjoy the benefits of the earlier tax regime, irrespective of when they are sold or transferred. This grandfathering clause is, however, subject to the satisfaction of the conditions set out in the Limitation of Benefits clause in the India-Singapore DTAA.