India’s revised tax treaty with Singapore, aimed at checking round-tripping of funds, has come into force. While most clauses of the amended treaty signed on December 30 took effect from February 27, the principal clause allowing levy of capital gains tax on investments routed through Singapore will come into force from April 1. “The Third Protocol amending the existing Avoidance of Double Taxation Agreement (DTA) between Singapore and the Republic of India entered into force on February 27, 2017,” a statement issued by Ministry of Finance of Singapore said. It further stated that “the 3rd protocol signed on December 30, 2016 entered into force on February 27, 2017 and its provisions shall take effect from February 27, 2017 except for Articles 2, 3 and 4 which shall take effect from 1 April 2017.” India had in May last year signed a revised tax treaty with Mauritius, triggering a change in the Double Taxation Avoidance Agreement (DTAA) with Singapore.
Mauritius and Singapore are among the top sources of foreign direct investments into India and also account for a big chunk of total inflows into the country’s capital markets. Under the amended treaty with Singapore, for two years beginning April 1, 2017, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. Full rate will apply from April 1, 2019. The revised treaty provides that gain made from sale of shares that were acquired before April 1, 2017 will be taxable only in the country where the seller is a resident.
But on shares acquired on or after April 1, 2017, capital gains tax will be levied in the country where the gains are made. “Gains from the alienation of shares acquired on or after April 1, 2017 in a company which is a resident of a Contracting State may be taxed in that State,” it states. But the rate of tax will be not more than 50 per cent of the prevalent capital gains tax in first two years – ie from April 1, 2017 to March 31, 2019.
Gains from the alienation of any property other than shares and profits made shall be taxable only in the country of which the alienator is a resident. Of the total FDI inflows of USD 29.4 billion in April- December 2015-16, Mauritius and Singapore accounted for USD 17 billion. Short term capital gain tax is levied at 15 per cent in India, while long term capital gain tax is zero.
As per the revised treaty, investments made prior to April 1, 2017, will be protected from new tax provisions. While Mauritius was the single biggest source of foreign direct investment into India in 2014-15, accounting for about 24 per cent of USD 24.7 billion FDI, Singapore accounted for 21 per cent. The taxation treaties with these nations is said to have been misused by many Indian and multinational companies to avoid paying tax or to route illicit funds.