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India will amend the Avoidance of Double Tax agreement with Singapore soon. The negotiation process is unlikely to be a long drawn one, since it requires a simple modification, according to officials in the income tax (I-T) department. Indian officials are in the process of reaching out to the Singaporean authorities for the amendment.
Singapore will likely get the same two-year transition benefit of 50 per cent capital gains tax like in the case of Mauritius. Limitation of Benefit is much higher in the case of Singapore, a threshold of Rs 50 lakh against Rs 27 lakh for Mauritius.
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The southeast Asian nation has emerged as the largest contributor of foreign direct investment (FDI) in the last financial year. For the nine-month period between April and December 2015, Singapore accounted for Rs 71,195 crore in FDI against Rs 39,506 crore through Mauritius. The changes to India-Mauritius Double Taxation Avoidance Convention last week has put the focus on a similar treaty inked between India and Singapore in 2005.
While there were expectations that similar changes would be made to the Singapore treaty, finance minister Arun Jaitley had hinted on Monday this might not be automatic. The minister said 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.
Consultants felt that Singapore might also be keen to renegotiate as the current arrangement might not be attractive for investors. In a note released soon after the announcement of the Mauritius Protocol, BMR Advisors said, “Any tax treaty is 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 acceding 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.”
Article 6 of the Protocol dated July 18, 2005 to the Singapore Tax Treaty provides that the benefits such as 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.
Consultants said that given 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.
The BMR note added the government 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, it added.
Like the Mauritius amendments, which leave out instruments other than shares, even the Singapore treaty changes are likely to stick to 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,” the BMR note added.
