On 30 December 2016, India and Singapore have signed a third protocol (“Protocol”) to revise their bilateral Avoidance of Double Taxation Agreement (“DTA”). Under the Protocol, India has the right to start imposing capital gains tax on alienation of shares of a company resident in India by a Singapore resident acquired on or after from 01 April 2017 whilst preserving the existing tax exemption on capital gains for shares acquired before 1 April 2017. For shares acquired on or after 1 April 2017, there will be a two-year transition period, during which the capital gains from such shares will be taxed at 50% of India’s domestic tax rate if the capital gains arise during 1 April 2017 to 31 March 2019.
The following changes have been introduced by the Protocol:-
Taxation of capital gains
- Gains arising from the alienation of shares of a company resident in India acquired before 1 April 2017 by a Singapore resident shall not be affected, subject to the fulfillment of the revised ‘limitations of benefit’ (“LOB”) clause;
- The benefit in the above point will not be available if the affairs of the company resident in Singapore were arranged with the primary purpose to take advantage of such benefit. Such benefit will also not be applicable to a shell or conduit company. A shell or conduit company is any legal entity with negligible or nil business operations or with no real and continuous business activities.
An entity is deemed to be a shell or conduit company if its annual expenditure on operations in Singapore is less than SGD200,000 or in India is less than Indian Rs.5,000,000, for each of the 12-month periods in the immediately preceding period of 24 months from the date on which the gains arise.
An entity is deemed not to be a shell or conduit company if it is listed on an recognised stock exchange of the country or it its annual expenditure on operations in Singapore is equal to or more than SGD200,000 or in India is equal to or more than Indian Rs.5,000,000, for each of the 12-month periods in the immediately preceding period of 24 months from the date on which the gains arise.
- Gains arising from the alienation of shares that arise during the period 1 April 2017 to 31 March 2019 by a Singapore resident, will be subject to a tax rate limited to 50% of the tax rate in India, subject to the specified conditions including expenditure on operations in Singapore of at least SGD200,000 or in India of at least Indian Rs.5,000,000 for the immediately preceding period of 12 months from the date on which the gains arise.
- Gains arising from the alienation of shares that arise after 31 March 2019 by a Singapore resident will be subject to tax at the then prevailing rate in India.
Interest rate withholding tax
There has not been any changes to the tax rate on interest payments made by a company resident in India under the Protocol which will remain at 15% while that under the Mauritius-India DTA is currently at 7.5%.
Article 9 on Associated Enterprises of the Protocol provides for both countries to enter into bilateral discussions for elimination of double taxation arising from transfer pricing or pricing of related party transactions.
Anti avoidance rules
The newly inserted Article 28A provides that the Protocol will not prevent India and Singapore from applying its domestic law and measures concerning the prevention of the tax avoidance or tax evasion.
Promotion of bilateral investments
Both India and Singapore agreed on steps towards a set of new initiatives for joint promotion of bilateral investments with a view to concluding an agreement in the second half of 2017.
In line with the Mauritius-India DTA, India has got the right to levy capital gains tax from 1 April 2017 for investments routed through Singapore under the Protocol. The Singapore-India DTA, which had been pegged to the Mauritius-India DTA, has had to be similarly amended. The Protocol will continue to be underpinned by the stringent substance requirements which are unique to the Singapore-India DTA, and which ensure that the Protocol can only be enjoyed by tax residents with substantive economic activities.
The Protocol will only come into force following both India and Singapore exchanging notifications that their formal ratification processes have been finalised and shall enter into force latest on 1 April 2017.
To read more on the treaty which was amended in December 2016, please click here.
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