Capital gains on alienation of shares to be taxable by India.
The India-Mauritius tax treaty was amended by way of a protocol signed by the two countries on May 10, 2016—marking a landmark shift in India’s taxation regime for capital gains from resident-based to source-based taxation. Since the amendment of the India-Mauritius tax treaty, amendments to the India-Singapore tax treaty have been awaited eagerly, mainly due to the capital gains benefit under the India-Singapore treaty being co-terminus with that under the India-Mauritius treaty.
The Singapore government announced on December 30, 2016 that Singapore and India have signed a third protocol amending the existing tax treaty between the two countries (Third Protocol). The changes in the Third Protocol are largely in line with the amendments made to the India-Mauritius tax treaty.
The Third Protocol
The Third Protocol provides for source-based taxation whereby capital gains arising from the sale of shares acquired on or after April 1, 2017 by a Singapore tax resident in an Indian company will be taxable in India. Shares acquired by a Singapore tax resident in an Indian company before April 1, 2017 have been grandfathered by the Third Protocol. As such, disposal of such shares will continue to enjoy the benefits under the existing treaty, subject to fulfillment of the limitation of benefits clause, as amended by the Third Protocol.
The Third Protocol provides for a transition period of two years for shares acquired on or after April 1, 2017 where capital gains arising from the sale of such shares will be subject to a tax rate not exceeding 50% of the domestic tax rate if the capital gains arise from April 1, 2017 to March 31, 2019, subject to fulfillment of the limitation of benefits clause, as amended by the Third Protocol.
The India-Singapore tax treaty as it stood prior to the Third Protocol provided for a limitation of benefits clause that prescribed the conditions to be fulfilled for tax benefits under the treaty to be enjoyed. The Third Protocol has amended the limitation of benefits clause to provide that treaty benefit is not available
- if the affairs of the Singapore entity were arranged with the primary purpose of taking advantage of the benefits under the treaty; or
- to a shell or conduit company with negligible or nil business operations or with no real and continuous business activities in Singapore.
In this respect, an entity is deemed not to be a shell or conduit if it is listed on a recognised stock exchange of India or Singapore or if its annual expenditure on operations in the resident country is at least S$200,000 in Singapore or ₹5,000,000 in India (as applicable) for each of the 12-month periods in the immediately preceding 24 months from the date on which the gains arise. Investments made during the two-year transition period will also need to fulfill the limitation of benefits requirements but only for the immediately preceding 12 months from the date on which the capital gains arise.
The Third Protocol, unlike the amendment to the India-Mauritius tax treaty, does not provide for a lowering of tax rate on interest income arising from debt investments. The amendment to the India-Mauritius tax treaty provided for a tax rate of 7.5% on interest income.
The Third Protocol also provides that the tax treaty shall not prevent India or Singapore from applying its domestic laws and measures with respect to the prevention of tax avoidance or tax evasion. This anticipates the implementation of the General Anti-Avoidance Rules (GAAR) by India that are set to come into force on April 1, 2017. The manner of and effects arising from the simultaneous application of both the treaty provisions and GAAR will need to be examined.
The text of the Third Protocol has been published by the Inland Revenue Authority of Singapore and is pending ratification by the Singapore Government.