THESE are taxing times indeed! The global shift on clamping down
on base erosion/profit shifting has the recently amended
India-Mauritius tax treaty to add to its list. These amendments
have created some anomalies in the India-Singapore tax treaty as
well. I will deal with these a little later.
For the last 30 years or so, Mauritius has had a fairy-tale tax
treaty with India. It exempted investors from capital gains tax
when they invested in shares of Indian companies through Mauritius.
Like Singapore, Mauritius does not tax capital gains on the sale of
shares. After 1991, when India opened up its economy, Mauritius
played a very important role in providing a platform for foreign
investment to India.
It allayed the concerns of many investors who feared double
taxation and lack of credit availability as a result of a
difference in source rules of taxation in India and jurisdictions
such as the US. The treaty went through its ups and downs, being
challenged in courts in India, but was upheld by the Supreme Court
of India in a landmark decision.
When Singapore and India were ready to sign the Comprehensive
Economic Cooperation Agreement (CECA) in 2005, they too amended
their tax treaty to bring it on a par with what India and Mauritius
had, albeit with higher standard of substance to be met in
Singapore. This has led to Singapore playing a very critical role
in the growth of investments into India. Singapore is indeed a
"natural hub" for India and can only benefit with
India's projected growth trajectory. In fact Singapore emerged
as the largest investor of FDI (foreign direct investment) in India
in the recent past. But some anomalies have crept into the
India-Singapore tax treaty which need to be dealt with
The last thing the two countries want is a loss in momentum in
their burgeoning economic relationship. The changes to the
Mauritius treaty with respect to taxation of capital gains
basically give the Indian government the right to tax capital gains
in the hands of investors who have invested via Mauritius. The
Singapore treaty with India had a "co-terminus" provision
which states that if there is such a change in the Mauritius treaty
in respect of capital gains, the capital gains provisions of the
Singapore treaty would cease to have effect. Simple to many, but an
interpretation and implementation nightmare to others!
The changes to the Mauritius treaty are quite clear with
sensible provisions relating to grandfathering investments in
shares till March 31, 2017. Investors want clarity and they seem to
have got that as far as Mauritius is concerned. The lack of a
similar grandfathering provision in the Singapore treaty means that
no such protection may be available to investments made under the
India-Singapore DTAA (double taxation avoidance agreement) for
investments in shares prior to March 31, 2017. Hence the urgent
need for clarity. What is quite clear is that the intention of
India and Singapore was that the two treaties should provide almost
equal treatment to investors. The news in India suggests that both
countries will be speaking soon to formally amend the treaty. My
view on what needs to be done with some urgency:
Keeping in mind the very critical role Singapore is playing in
the development of India, the tax treaty should (like the
India-Mauritius pact) have clear grandfathering provisions with
respect to all investments made by residents of Singapore in the
shares of Indian companies till March 31, 2017, and after that,
till March 31, 2019, a rate of tax not exceeding 50 per cent of the
applicable capital gains tax in India on gains made prior to March
31, 2019, subject to meeting the limitation of benefits conditions
in the Singapore-India treaty. This would then be a mirror to the
treaty with Mauritius.
Mauritius tax residents can now lend money to Indian residents
and be subject to a lower withholding tax rate of 7.5 per cent in
India. The rate applicable to similar debt investments from
Singapore is currently 15 per cent (with a reduced rate of 10 per
cent for banks). Singapore is a leading financial centre in the
world and will undoubtedly be a centre for debt investments into
India as well. Therefore a similar withholding tax rate of 7.5 per
cent should be negotiated into the treaty. This will encourage the
growth of the debt markets in both India and Singapore. Singapore
should also look at its domestic law provisions to ensure that
investors investing in debt from Singapore are not put to a greater
burden than those investing from Mauritius.
I do hope that the two countries take this on as a matter of
urgency and continue building on the strategic partnership they
This article was published in The Business Times, Singapore dated May 19, 2016.
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