The issue is significant from the Indian perspective as resident companies of Singapore stand to benefit from their own taxation laws. So, there is a possibility that if the clause is not modified, some companies might take advantage of the route. The India Singapore DTAA is up for review in this fiscal year.
Under clause 2(b) of article 12 of the DTAA between the two governments, signed in 1994, technical services provided by companies hailing from the island nation will be taxed in India at the rate of ten per cent of the gross amount of royalties and fees, only if it is in connection with the use of such royalties by them.
This means that a financial entity can use the provisions of the agreement to claim exemption from a tax on technical services if it can prove that those services had no connection with the use of a copyright, a patent, a formula or a process.
So a banking or insurance company, for instance, will be exempt from any tax liability.
This means that if such entities set shop in India, claiming residence in Singapore, the government cannot levy a tax on their services, if they can prove that the technical service they provide is not connected with any royalty business.
The provision different from the ones that India has signed with other countries including the Organisation for Economic Cooperation and Development (OECD) countries like France, the Netherlands and some other countries.
In these conventions, the tax treatment on royalties and fees for technical services does not demand establishment of a connection between the two. For instance the Convention signed with France which came into effect the same time as the one with Singapore in August 1994, says royalties and fees for technical services may also be taxed in the contracting state (meaning India) at the rate of ten per cent.
But the one with Singapore puts in a rider saying royalties and fees for only those technical services that are ancillary and subsidiary to the enjoyment of the royalty may be taxed.
There are only three countries with whom India's tax treaty allows for such a nexus. These are besides Singapore, UK and USA. However under US laws treaty shopping is not allowed.
