The India-Singapore Tax Treaty
Starting this April, India will hold the right to tax capital gains on its equity shares sold by Singapore residents. The change came via an amendment to Singapore and India’s 20-year old Avoidance of Double Taxation Agreement (DTA) on 30 December 2016.
The newest protocol was signed by Mr Lim Thuan Kuan, Singapore’s High Commissioner to India and India’s Chairman of the Central Board of Direct Taxes, Shri Sushil Chandra in New Delhi. The treaty aims to phase out capital gains tax exemption.
The contract was preceded by a meeting between Prime Minister Lee Hsien Loong and Prime Minister Narendra Modi last October. According to this IRAS media release, Singapore is one of the biggest profile investors in India markets. We are also the largest foreign direct investor into India for the months of April 2015 to March 2016.
The existing taxation terms on capital gains are retained for shares acquired before April 1st of this year. Tax treatment for gains procured from the alienation of such shares follow these conditions:
Capital gains from this period will still be taxable only in the Residence State of the alienator
Subject to specified conditions including the expenditure on operations of the alienator in its residence State of at least S$200,000 in Singapore or INR5,000,000 in India, as the case may be, for each of the 12-month periods in the immediately preceding period of 24 months from the date on which the gains arise
Shares acquired from 1 April 2017 to 31 March 2019 will come under the protocol’s two-year transition period terms, for which capital gain of these shares are subjected to a tax of 50% of India’s prevailing domestic tax rate. The same conditional sums for expenditure on operations apply, but only for cases whereby there is an immediate preceding period of 12 months from the date gains arise.
Capital gains after 31 March 2019 will be taxed according to the state in which the company whose shares are alienated is resident.
Another noteworthy Article to consider in the DTA protocol is this: in Article 28A, it states that this Agreement shall not prevent a Contracting State from applying its domestic law and measures concerning the prevention of tax avoidance or tax evasion.
The Joint Promotion for Bilateral Investments
Deputy Prime Minister and Coordinating Minister for Economic and Social Policies of Singapore, Mr Tharman Shanmugaratnam and the Minister of Finance and Corporate Affairs of India, H.E. Shri Arun Jaitley are also in agreement to make further steps towards a series of “new initiatives for joint promotion of bilateral investments” with a vision to finalizing an agreement within the second half of this year.
The Third Protocol is awaiting ratification and as such, is not enforceable to date. The previous two protocols were both signed in India in June 2005 and June 2011, while the first DTA took place on 24 January 1994.