India to tax Singapore investors’ capital gains from April

India will start imposing capital gains tax on investments coming from Singapore from April and fully withdraw exemptions in two years as the two countries agreed to amend a decade-old treaty after New Delhi rolled back similar concessions to Mauritius and Cyprus earlier this year.

India and Singapore today entered into an amended Double Taxation Avoidance Agreement (DTAA) for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income, by signing a third protocol.

With the amendments, announced by finance minister Arun Jaitley, investors based in Singapore will no longer benefit from tax exemptions on capital gains taxes.

This is 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 India-Singapore DTAA at present provides for residence based taxation of capital gains of shares in a company. The third protocol amends the DTAA with effect from 1 April 2017 to provide for source based taxation of capital gains arising on transfer of shares in a company. This will curb revenue loss, prevent double non-taxation and streamline the flow of investments.

In order to provide certainty to investors, investments in shares made before 1 April 2017 have been grandfathered subject to fulfillment of conditions in Limitation of Benefits clause as per 2005 Protocol. Further, a two year transition period from 1 April 2017 to 31 March 2019 has been provided during which capital gains on shares will be taxed in source country at half of normal tax rate, subject to fulfillment of conditions in Limitation of Benefits clause.

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.

Changes to the treaty with the Asian financial centre had been widely expected after India this year similarly re-drafted a 33-year old tax treaty with Mauritius.

The tax treaty between India and Singapore had a provision that any changes in the Mauritius treaty would automatically apply to the one with the Asian country.

The move to tighten tax treaties is part of Prime Minister Narendra Modi's anti-corruption drive, which includes tightening loopholes for firms or rich individuals setting up a presence in jurisdictions with tax exemption treaties.

Regulators have long suspected rich Indians were routing cash through these tax jurisdictions, and channeling money back to India in a practice known as "round tripping".

"We are able to give a reasonable burial to this black money route," Jaitley told reporters at a news briefing.

Capital gains tax will be imposed on investments from Singapore that are made from April onwards. The tax rate will be half the prevailing Indian rate for the next two years and rates will then be equated by April 2019. Jaitley said.

Foreign direct investment flows from Singapore stood at $50.6 billion between April 2000 and Sept 2016, contributing more than 16 percent to total capital inflows during that period, second only to Mauritius.