India: A New Year, A New Innings: After Mauritius & Cyprus, Singapore To Lose Capital Gains Tax Exemption


Since the protocol amending the India-Mauritius Tax Treaty was signed on 10 May 2016, speculation has run rife among legal circles and the investor community of a possible re-negotiation of the India-Singapore Tax Treaty (Treaty) as well. This is because when the Treaty was first amended by a protocol with effect from 1 August 2005 (2005 Protocol), it was specifically provided that residence based taxation of capital gains under the Treaty will only remain in force so long as the treaty with Mauritius provides for a capital gains exemption in the source state. The capital gains exemption under the Treaty was therefore made coterminous with that under the India-Mauritius tax treaty. While according to media reports, the Government of India was in talks with Singapore to renegotiate the Treaty, the fate of the capital gains exemption provided thereunder remained largely unclear.

This uncertainty has finally been put to rest as on 30 December 2016, the Ministry of Finance, Government of India issued a press release notifying that a third protocol (Protocol) amending the Treaty had been signed. While the official text of the Protocol is still awaited, according to the press release, it seems that the changes are largely akin to those made in the renegotiated tax treaties with Mauritius and Cyprus. On 11 May 2016 and 12 May 2016, we had previously highlighted changes to the renegotiated tax treaty with Mauritius. Similarly, changes made to the renegotiated tax treaty with Cyprus were reported on 16 December 2016 and 22 December 2016.

The Protocol at a glance

The Treaty, in its present form, provides for residence based taxation of capital gains arising from the alienation of any property other than immovable property, movable property which forms a part of an entity's permanent establishment, and ships or aircrafts operated in international traffic. The Protocol seeks to amend the Treaty with effect from 1 April 2017 to provide for source based taxation of capital gains arising on transfer of shares in a company. Accordingly, capital gains derived in India by a resident of Singapore from sale of shares of an Indian company would now be taxable in India. In keeping with the Government's resolve to curb tax uncertainty, which had previously caused unexpected disruptions in the investment climate of the country, a safe harbour in the Protocol grandfathers all investments made in India via Singapore on or before 31 March 2017 subject to fulfilment of conditions in the "Limitation of Benefits" (LOB) article as introduced by the 2005 Protocol.

The Protocol also mirrors the two-year transition period (i.e. from 1 April 2017 to 31 March 2019) as provided under the amended India-Mauritius tax treaty, during which capital gains arising from the alienation of shares will be taxed in the source country at 50% of the normal tax rate, subject to fulfilment of the conditions of the LOB article.

A tabular representation of the revised capital gains taxation regime is set out below:


Prior to 1 April 2017 Anytime No, subject to satisfaction of the LOB test

On or after 1 April 2017 (Transition Period)

By 31 March 2019 Yes; Taxable @ 50% rate, subject to satisfaction of the LOB test
On or after 1 April 2019  Yes; Taxable at full rate
On or after 1 April 2019 Anytime Yes; Taxable at full rate

The Protocol further seeks to facilitate relief from economic double taxation in transfer pricing cases through the "Mutual Agreement Procedure" and also provides for the application of domestic law provisions with respect to prevention of tax avoidance or tax evasion.

KCO Comment

As per the press release, the Protocol seeks to introduce source based taxation of capital gains arising from the alienation of shares of a company. Therefore, it seems that gains arising from the transfer of other capital assets such as debentures, partnership interests etc. and from an indirect transfer of Indian company shares in a two-tiered Singapore structure would continue to remain outside the taxability net even after 1 April 2017, subject to the satisfaction of the 'general anti-avoidance rules' (GAAR). However, the official text of the Protocol will need to be seen to have more clarity on these aspects.

There appears to be no change contemplated with respect to tax rates on interest income, which under the Treaty in its current form can be as high as 15%. With a mere 7.5% withholding tax rate on interest payments, Mauritius continues to appear as a more attractive jurisdiction for routing debt investments than both Cyprus and Singapore.

The message of the present Government through its slew of policy initiatives, including the changes introduced by the Protocol, is loud and clear – that India is committed to protect its tax base, prevent double non-taxation, and check the menace of black money through automatic exchange of information. The grandfathering provision and the gradual phasing out of the exemptions in the Protocol are also reflective of the Government's commitment to promote a non-adversarial taxation regime and to move away from retrospective taxation and tax uncertainty

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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