Five things to know about the Singapore Treaty

The changes to India-Mauritius Double taxation avoidance convention (DTAC) last week have put the focus on a similar treaty between India and Singapore. For the nine month period between April and December 2015, Singapore accounted for Rs 71,195 crore in foreign direct investments against Rs 39,506 crore through Mauritius.  While there were expectations that similar changes would be made to the Singapore treaty, finance minister Arun Jaitley has hinted that this might not be an automatic process. The minister said on Monday that Singapore "is a separate sovereign state, it (Mauritius treaty) does not ipso facto automatically extend. The principles will have to be applied, but applied through a process of renegotiation". He also recalled how renegotiations of the Mauritius treaty took nearly two decades.

In a note released after the Mauritius announcement, tax-advisory firm BMR Advisors addressed key issues on the Singapore Treaty. Here are a few highlights:

Would the capital gains exemption under the Singapore Tax Treaty fall away, from when?

Article 6 of the Protocol, dated July 18, 2005, to the Singapore Tax Treaty provides that the benefits qua capital gains exemption under the Singapore Tax Treaty would remain in force only till the time Mauritius Tax Treaty provides for capital gains exemption on alienation of shares. Accordingly, the benefits accorded under the Singapore Tax Treaty in this regard would fall away, unless amended. Given that the Mauritius Tax Treaty benefits on alienation of shares would be available until March 31, 2017, even the Singapore Tax Treaty benefits for similar transfers should be available until March 31, 2017, but a clarification in this regard will help.

Whether the grandfathering provisions (in respect of capital gain on sale of shares acquired prior to April 1, 2017) will also be available under the Singapore Tax Treaty?

In our view, the Government of India should come up with a level playing field for investments from Mauritius and Singapore and avoid any arbitrage between jurisdictions. Accordingly, the grandfathering provisions should also be built in the Singapore Tax Treaty. However, one will have to wait and watch the diplomatic discussions between India and Singapore in this regard.

Whether the transition provisions (in respect of capital gain on sale of shares acquired on or after April 1, 2017, and exited on or before March 31, 2019) and the corresponding lower rates of taxation during this period also be available under the Singapore Tax Treaty?

In our view, the same should be made available subject to explicit agreement between India and Singapore in this regard.

What about Instruments other than shares?

Paragraph 4 of Article 13 of the Singapore Tax Treaty replaced the earlier paragraphs 4, 5 and 6 of Article 13. Accordingly, it is likely that the erstwhile paragraphs 4, 5 and 6 will now be re-instated for paragraph 4 of the Singapore Tax Treaty. In such case, only capital gains arising from alienation of shares, which derive value from immovable properties situated in India or shares of an Indian company, would be taxable in India; capital gains arising on other securities, such as convertible debentures, futures and options etc, should not be subjected to income-tax in India.

Will an agreement with the Singapore Government be required to give effect to above changes?

Any tax treaty is a bilateral agreement and hence, an amended agreement will need to be reached with the Singapore Government. This said, the Singapore Government should be open to accede to requests from the Indian Government given that the existing Singapore Tax Treaty in its current form may not be attractive from an investor standpoint.