This article summarizes the key amendments proposed to the existing Double Tax Avoidance Agreement (DTAA) entered into between India and Singapore in 1994 (1994 DTAA) as amended by a protocol dated 18 July 2005 (2005 Protocol) and the second protocol dated 1 September 2011. The third protocol to amend the 1994 DTAA was signed on 30 December 2016 (the 2016 Protocol) followed by official announcements made by the Government of India (GOI) and the Government of the Republic of Singapore (GOS). The text of the 2016 Protocol is now available on the official website of GOS.
To recollect, in terms of the 2005 Protocol, it was agreed that the benefit of taxation of capital gains, from sale of shares only in the country of residence of the alienator (i.e. exemption from taxation in source country), will remain in force so long as similar treatment is accorded in the India-Mauritius DTAA.
With the amendment of India-Mauritius DTAA on 10 May 2016, the amendment to India- Singapore DTAA was eagerly awaited. The 2016 Protocol, as expected, is on lines similar to the amendments made to India-Mauritius DTAA. Also, it aligns with India’s philosophy of providing for source-based taxation of capital gains from sale of shares of a company resident in India as also reflected by the recently amended India-Cyprus DTAA.
The 2016 Protocol provides for source-based taxation of capital gains arising from transfer of shares with effect from 1 April 2017. Shares acquired on or before 31 March 2017 are grandfathered and continue to qualify for source tax exemption subject to fulfilment of conditions in the modified Limitation of Benefits (Modified LOB) provisions of the 2016 Protocol.
Along the lines of amended India-Mauritius DTAA, transitory provisions for reduced taxation by the source country (taxation at 50% of domestic tax rates) on capital gains from alienation of shares has also been provided for a limited period from 1 April 2017 to 31 March 2019 subject to fulfilment of Modified LOB conditions. Broadly, in relation to transitory relief, modified LOB looks at Expenditure test for a period of 12 months preceding the date on which gains arise as compared to the period of 24 months comprising two blocks of 12 months each, which continue to apply for grandfathered investments.
Further, in line with commitment made as part of Article 14 on dispute resolution mechanism of OECD’s BEPS project, a provision has been inserted for providing co-relative adjustment in transfer pricing cases. The new provision explicitly provides priority to domestic anti-avoidance measures over the 1994 DTAA (read with its Protocols).
The 2016 Protocol will be effective once the requisite procedures for its ratification are completed by both the countries. However, irrespective of the completion of procedure, 2016 Protocol shall enter into force from 1 April 2017.