India to tax capital gains for S'pore investors

An Indian pedestrian as he speaks on a phone while walking by stock prices on a digital broadcast on the facade of the Bombay Stock Exchange (BSE) building in Mumbai.
An Indian pedestrian as he speaks on a phone while walking by stock prices on a digital broadcast on the facade of the Bombay Stock Exchange (BSE) building in Mumbai. PHOTO: AFP

Move to take effect from April next year, after revision of double tax avoidance treaty

India and Singapore have revised a bilateral tax agreement to allow India to start imposing capital gains tax on investments from Singapore from April next year and fully withdraw tax exemptions in two years.

This applies to the capital gains tax exemption for shares in a company, which is currently enjoyed by Singapore investments in India.

Visiting Singapore Deputy Prime Minister Tharman Shanmugaratnam and Indian Finance Minister Arun Jaitley yesterday finalised the terms of the revised bilateral Avoidance of Double Taxation Agreement, said Singapore's Ministry of Finance (MOF) in a statement.

Both also agreed on steps towards a set of new initiatives for joint promotion of bilateral investments with a view to concluding an agreement in the second half of next year, said MOF.

Under the revised terms, the existing tax exemption on capital gains for shares acquired before April 1, 2017 will remain, said MOF.

For shares acquired on or after April 1, 2017, capital gains from such shares will be taxed at 50 per cent of India's domestic tax rate if the capital gains arise during April 1, 2017 to March 31, 2019.

After March 31, 2019, the entire capital gains tax will go to India,  said Mr Jaitley at a press conference.

The amendments were expected after India this year re-drafted a 33-year-old tax treaty with Mauritius.

There is a provision in the tax treaty between India and Singapore saying that any changes in the Mauritius treaty would automatically apply to the one with Singapore.

Mr Jaitley said the move was to help plug a source of possible misuse of the double tax avoidance treaty in the round tripping of funds and generation of black money.

Mauritius and Singapore account for a large portion of all foreign direct investment inflows into India, The Times of India reported, as companies worldwide routed funds into the country through the two countries to avoid taxes.

India and Singapore share close political and economic ties, which grew fast after the two countries signed a Comprehensive Economic Co-operation Agreement in 2005. 

Singapore remains among India's top investors - it was India's largest foreign direct investor from April last year to March this year, with US$13.7 billion (S$19.8 billion).

  The negotiations to amend the tax treaty had gathered pace after Prime Minister Lee Hsien Loong's visit to India in October this year.

In remarks made in India, he said Singapore did not tolerate any money laundering or round tripping. 

The Indian government also withdrew capital gains tax exemption to Cyprus.

It is understood that India had argued that it could not make an exception for Singapore.

Mr Jaitley said the withdrawal of capital gains exemptions to the three countries was in line with the government drive against black money, which led to the demonetisation of currency. 

He said: "The revisiting of these arrangements was extremely important along with the battle against black money being fought currently in India. It is a happy coincidence that by amending them this year, we have been able to give reasonable burial to the black money route." 

A version of this article appeared in the print edition of The Straits Times on December 31, 2016, with the headline 'India to tax capital gains for S'pore investors'. Print Edition | Subscribe