Monday, 27 February 2017

New protocol to tax treaty between Singapore and India provides for source-based taxation of gains on shares

On 30 December 2016, Singapore and India announced the signing of a third protocol to the 1994 tax treaty, which will allow India to tax capital gains on investments routed through Singapore. The amendments to the treaty have been expected since India amended its tax treaties with Mauritius  in April 2016 and November 2016, respectively, to prevent the “round tripping” of funds. Singapore’s treaty with India contains a provision that the capital gains benefit will apply only as long as the capital gains benefit continues under the India-Mauritius treaty.
The Singapore-India treaty currently provides for residence-based taxation of capital gains derived from the sale of shares in a company. The third protocol, which is expected to take effect no later than 1 April 2017, will provide for source-based taxation of such gains, with a concessional tax rate applying for all shares acquired on or after 1 April 2017 and sold by 31 March 2019.
To provide certainty to investors, the two governments agreed that all investments in shares made before 1 April 2017 will be “grandfathered.” However, the grandfathering treatment (i.e. taxation only in Singapore of gains derived by a Singapore resident) will apply only if the Singapore resident satisfies the prescribed conditions in the limitations on benefits clause in the treaty.
With respect to shares of an Indian company acquired by a Singapore resident on or after 1 April 2017 and sold by 31 March 2019, a capital gains tax will be payable in India at 50% of the prevailing tax rate. The capital gains tax rate in
India currently is 10% for long-term capital gains arising on the sale of shares of unlisted companies and 30% for short-term capital gains (i.e. shares of an unlisted company that are held for less than 24 months). This reduced taxation under the treaty will be applicable only if the conditions in the limitation on benefits clause are satisfied. Any capital gains arising from the sale of shares acquired on or after 1 April 2017 and sold on or after 1 April 2019 will be
taxable in India at the prevailing tax rates.
The third protocol also inserts article 9(2) of the OECD model convention into the existing article 9 of the treaty. The new paragraph will facilitate the conclusion of bilateral advance pricing arrangements between the two countries and eliminate double taxation arising from adjustments made pursuant to transfer pricing or related party transactions.
This new paragraph is included to implement the BEPS standards relating to the mutual agreement procedure in transfer pricing cases.

Source: Deloitte