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Amendment to the Singapore - India Tax Treaty

AMENDMENT TO THE SINGAPORE-INDIA TAX TREATY:

IMPLICATIONS FOR SINGAPORE-BASED INVESTMENT VEHICLES

1.     Background

On 30 December 2016, Singapore and India signed a Protocol amending the Double Tax Avoidance Treaty (DTA) in force between the two countries.  The provisions of the Protocol are expected to become effective on 1 April 2017 in respect of income derived from India.  This note analyses the main changes brought by the Protocol and its implications for Singapore-based entities.

 

2.     The Changes

2.1     Shift in the Taxing Rights on Capital Gains

The Protocol provides for capital gains made by a Singapore resident on disposal of shares of an Indian company to be henceforth taxable in India.  Currently, the taxing rights on such gains sit with Singapore, subject to satisfaction of the Limitations of Benefit (LOB) clause which requires, inter alia, the Singapore resident to incur a minimum expenditure of S$ 200,000 p.a. in Singapore for two consecutive years prior to the disposal.  Singapore does not tax capital gains.

2.2     Transitional Provisions

Capital gains arising from purchases and sales of shares effected during the period from 1 April 2017 to 31 March 2019 will be taxed at a concessional rate equivalent to 50% of the applicable domestic Indian tax rate.  Minimum expenditure of S$ 200,000 is required in Singapore for the 12-months period immediately preceding the disposal as part of the LOB clause.

2.3      Grandfathering Provisions

Capital gains on disposal of shares acquired prior to 1 April 2017 shall continue to be taxed in Singapore, irrespective of the disposal date, provided a minimum expenditure level of S$200,000 per annum is incurred in Singapore in the two immediate years prior to disposal.

 

3.     Comparative Analysis: Singapore v/s Mauritius

The DTA between India and Mauritius has also been amended during the course of 2016.  The notable differences between the Singapore Protocol and the Mauritius Protocol are summarized as follows:

 

 

SINGAPORE PROTOCOL

MAURITIUS PROTOCOL

Capital Gains Taxing Rights (on share disposals):

 

Pre-April 2017 Investments

With Singapore (exempt)

 

Subject to minimum expenditure of S$ 200,000 p.a. for 2 preceding years

With Mauritius (exempt)

 

No minimum expenditure requirement spelt out

Capital Gains Taxing Rights (on share disposals):

 

April 2017 to March 2019

 

With India, at 50% of Indian domestic tax rate

 

Subject to minimum expenditure of S$ 200,000 for last 12 months (approx. USD 140,000)

 

With India, at 50% of Indian domestic tax rate

 

Subject to minimum expenditure of approx. USD 45,000 for last 12 months

Capital Gains Taxing Rights

April 2019 onwards

Shares

 

Non-share instruments

 

 

With India

 

With Singapore (exempt)

 

With India

 

With Mauritius (exempt)

Withholding tax on interest

 

  • Bank / NBFI transactions
  • Others

 

 

10%

15%

 

7.5% (Post April 2017)

7.5% (Post April 2017)

Treaty Override Provision

 

Yes

Indian tax avoidance legislation explicitly takes precedence over treaty

No

No specific mention of any treaty override provisiong

4.      Implications

  • Restructuring of pre-April 2017 equity investments through Mauritius may constitute a more cost effective alternative for Singapore-based SPVs.  The absence of a treaty override provision in the Mauritius Protocol should provide added comfort to investors.
  • Mauritius remains more cost efficient for structuring of investments to be acquired on or after 1 April 2017 and disposed of by 31 March 2019.
  • Effective April 2017, Mauritius emerges as the most attractive jurisdiction for structuring of Indian debt investments. 

 

IFS will be pleased to advise you in respect of your structuring and / or restructuring requirements both in Singapore and Mauritius.