Singapore investors’ capital gains to attract tax in India

Revisiting the pact was important to curb black money, says Arun Jaitley

December 30, 2016 10:55 pm | Updated December 31, 2016 12:50 am IST

NEW DELHI: India secured amendments to the Double Taxation Avoidance Agreement (DTAA) with Singapore on Friday, effectively closing one route of laundering domestic black money by “round-tripping” it from countries like Mauritius, Cyprus and Singapore.

The Centre had been trying to renegotiate the DTAA with Mauritius since 1996 and finally got a deal this May, and since the Singapore tax treaty was based on the same terms as Mauritius, efforts were afoot to re-negotiate the pact with Singapore. A similar treaty with Cyprus was amended in November.

“There was a reasonable apprehension that these agreements were being misused for round-tripping domestic black money, organising its flight outside the country and bringing it back into the country through these three routes. Since there has been a significant effort by the government to eliminate the possibility of black money and its usage in India, revisiting these pacts was extremely important,” Mr. Jaitley said.

Along with the war on black money currently being fought by the government, the finance minister termed the revised DTAA with Singapore a happy coincidence. “By amending these pacts, we have been able to give a reasonable burial to this black money route that existed,” he said, stressing that the demand to revisit these pacts had also been made repeatedly in Parliament to crack down on tax avoidance.

On the same lines as the amended pact with Mauritius, the tax exemptions for investors under the existing agreement will be discontinued from April 1, 2017. “Investments made before March 31, 2017, will be grandfathered, and after that, for two years, the capital gains will be shared half and half between the country of residence of investor and India. Post-2019, the entire capital gains becomes exclusive to India,” the minister said.

A significant apprehension about these pacts was the complete exemption of taxes on capital gains that investors could utilise in the name of double tax avoidance as these three countries had no capital gains taxes. “So the beneficiary would not pay any capital gains tax in India on the ground that the Singapore taxation rules would be applicable to them and there was no capital gains in those jurisdictions.”

A taxation expert said that while the agreement was expected and could boost foreign exchange flows, the fine print would hold the key to its implementation.

“This would set to rest the anxiety of the investors investing into India from Singapore,” said Girish Vanvari, national head of tax for KPMG in India. “Effective April 1, 2017, capital gains arising from investments made after April 1, 2017 will be taxed in India at half the domestic rate as in case of the amended Mauritius treaty and be fully taxable after April 1, 2019.”

He said that clarity was needed on the withholding tax rate that would apply for such investors. The Mauritius treaty provides for a 7.5 per cent tax while the India-Singapore treaty has a 15 per cent tax rate.

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