India recently signed a pact with Singapore to amend a decade-old treaty to begin taxing capital gains on investments routed through the South East Asian nation. With the signing of the amended tax treaty, the government had closed all three channels—Mauritius, Cyprus and Singapore, from where domestic black money was flown out and then routed back to the country using these tax treaties.
Highlights:
- After amending its tax treaties with Mauritius and Cyprus earlier this year, India revised its Double Taxation Avoidance Agreement (DTAA) with Singapore enabling India to tax capital gains of Singapore-based investors transacting in Indian securities from April 1, 2017.
- For first two years, India and Singapore will share the taxes on such gains equally and from third year onwards, all such taxes will accrue to India.
- In line with the changes in the earlier revised treaties with the other two nations, India and Singapore have amended the Third Protocol of the India-Singapore DTAA with effect from April 1, 2017 to provide for source-based taxation of capital gains arising from transfer of shares in a company as against residence-based taxation of capital gains at present
- As per the revised DTAA, investments in shares made before April 1, 2017 have been grandfathered subject to fulfillment of conditions in Limitation of Benefits (LoB) clause.
- Also, a two-year transition period from April 1, 2017 to March 31, 2019 has been provided during which capital gains on shares will be taxed in source country at half of normal tax rate, subject to conditions in the LoB clause.
- The Third Protocol also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases.
- The Third Protocol also enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion.
Note:While gains on sale of shares held for less than 12 months are treated as short-term capital gains and attract a 15 per cent short-term capital gains tax, the gains on sale of shares after holding for 12 months are treated as Long-Term Capital Gains (LTCG) and, currently, attract zero tax.