Singapore, like Mauritius before it, has lost some of its tax advantages as an investment channel to India, says Mark Voumard of Gordian Capital Singapore.
The Singapore-India Double Taxation Agreement (DTA) was signed on January 24, 1994. It paralleled an existing agreement between India and Mauritius. The respective DTAs provided exemptions for Singapore or Mauritius-based investors from capital gains tax arising from the sale of shares in Indian companies.
The Singapore DTA was amended twice by protocols dated June 29, 2005 and June 24, 2011.
Benefiting from their respective DTAs, Mauritius and Singapore have been the top nations for inward-bound foreign direct investment into Indian equities, accounting for half of the inflows between 2000-16.
Last year, the Indian government amended its DTAs with Mauritius and Cyprus (which had a similar DTA), to allow capital gains tax on investors from those jurisdictions. This seems intended to stop perceived round-tripping of funds, which has been thought to include domestic ‘black money’.
Revisions to the Mauritius DTA necessitated corresponding changes on capital gains tax for Singapore. India and Singapore accordingly signed a new protocol on December 30, 2016.
Following the government’s line, press coverage of the announcement in India placed all these DTA revisions firmly in the context of the wider campaign in India against tax evasion. The Indian finance minister, Arun Jaitley, said “the revisiting of these arrangements was extremely important and along with the battle of black money that is being fought currently in India, it is a very happy coincidence that by amending them, we have been able to give a reasonable burial to this black money route which existed”. Intended or not, the unfortunate by-product is that genuine overseas investors are impacted by the change.
The 2005 protocol stated that capital gains derived by a Singapore resident from the alienation of shares of a company resident in India were taxable only in Singapore, subject to fulfilment of the limitation of benefits clause.
Importantly, however, the new protocol marks a shift from residence-based taxation to source-based taxation. Capital gains arising on or after April 1, 2017 from the alienation of shares of a company resident in India will now be subject to tax in India.
The revised DTA allows grandfathering of the capital gains tax exemption on investments in shares made before that date, subject to fulfilment of the conditions in the limitation of benefits clause.
In addition, there is a two-year transition period from April 1, 2017 to March 31, 2019. This provides for capital gains on shares in an Indian-resident company, acquired on or after April 1, 2017, to be taxed in the source country (India) at no more than half the normal rate.
Note that the half-rate is applicable only on capital gains arising from the sale of shares. This is subject to conditions in the limitation of benefits clause that restrict this concession to investors that can satisfy criteria defining Singapore tax residence.
Singapore was the largest foreign direct investor into India for the period from April 2015 to March 2016, with $13.7 billion, and one of the largest portfolio investors in Indian markets.
Simultaneous with the announcement of the new Singapore DTA protocol, the two governments agreed on steps towards a set of initiatives for joint promotion of bilateral investments with a view to concluding an agreement in the second half of 2017. Additional tax incentives have not been ruled out in this context.
Under the original DTA, and continuing under the new protocol, an entity is not entitled to the capital gains tax exemption in the source state if its affairs were arranged with the primary purpose of taking advantage of such benefits. Shell or conduit companies, for instance resident legal entities with negligible or nil business operations, or with no real and continuous business activities, are not entitled to the capital gains tax exemption in the source state.
In Singapore, as was previously the case, one of the criteria is a requirement for an annual expenditure of at least 200,000 Singaporean dollars in Singapore or 5 million rupees in India on operations in each of the two blocks of 12 months in the immediately preceding period of 24 months before the date on which the gains crystallise.
To qualify for the transitional lower tax rate concession under the new protocol, the expenditure thresholds remain unchanged, but the corresponding temporal limits have been reduced to the immediately preceding period of 12 months before the date on which the gains arise.
Licensed, regulated asset management firms with substance based in Singapore, which are launching Singapore-domiciled funds to invest in the region, including India, will typically meet both criteria.
It should also be noted that capital gains tax exemption on securities other than shares continues under the DTA even after April 1, 2017.
ON A PAR?
By comparison, under the original Mauritius DTA there was no required level of operational expenditure in order to avoid being deemed to be a shell or conduit company. Under the new Mauritius protocol, there is a requirement to incur operational expenses of at least 2.7 million Indian rupees or 1.5 million Mauritius rupees in the 12 months immediately preceding crystallisation of capital gains.
Given the historical large gap in expenditure requirements between Singapore and Mauritius, one might have expected India-focused funds to have favoured Mauritius as a domicile. On the contrary, owing to increased regulatory requirements of investors themselves, increasing levels of due diligence by institutional investors, and a need for greater substance, we have over the last few years seen a movement by investors into professionally-managed, institutional quality funds domiciled in Singapore.
The key information released thus far means that Singapore and Mauritius remain on a par for equity funds as far as capital gains tax is concerned, but we have not yet heard if there will be a reduction in the rate of withholding tax on interest to 7.5% as applies under the Mauritius protocol.
If the rate of withholding tax on interest for Singapore is retained at 15% versus 7.5% for Mauritius, it suggests that Mauritius will be preferred or investment into India by debt funds.
Mark Voumard is the founder and chief executive of Gordian Capital Singapore
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