The Straits Times says

Resetting tax relations with India

Starting in April, India will begin imposing capital- gains tax on share-market investments in the country that originated in Singapore. This change is embodied in the revised Avoidance of Double Taxation Agreement (DTA) that was inked in New Delhi recently by Mr Lim Thuan Kuan, Singapore’s High Commissioner to India, and Mr Sushil Chandra, chairman of the Central Board of Direct Taxes, India. The existing tax exemption on capital gains for shares acquired before April 1 this year will remain. With this tweaking of arrangements, the tax treatment of Singapore investments would fall in line with those of Mauritius, a nation that had enjoyed a beneficial tax treaty with India for an even longer period.

Before the Singapore DTA was revised, New Delhi had clawed back similar tax treaties with Mauritius and Cyprus. India's motives for seeking to tweak the DTA are well known. Prime Minister Narendra Modi is in the midst of a concerted drive to improve tax collection. New Delhi suspects that a large part of the funds flowing into India's financial markets is money round-tripped from India, and it also believes that Indian securities are enough of a draw without needing special incentives for investing in them.

Singapore will not cavil at India's desire to improve its tax collection, or the manner and timing of its incentives and disincentives for investors. It is for New Delhi to determine how much of the money is recirculated, if at all, and whether the nation benefits by receiving a portion of that, or see it go elsewhere. For its part, the Monetary Authority of Singapore's actions have shown consistently that it does not encourage either illicit funds or round-tripping. While the financial industry in Mauritius was, to a great extent, dependent on the special dispensation it enjoyed from India, Singapore's case is different altogether. The city-state lies at the heart of a thriving region which needs ever more sophisticated financial services. It would do well to remember that Singapore was the largest foreign direct investor in India from April 2015 to March last year, with nearly $20 billion sent in. In the drive to improve the tax-collection regime, it would be unwise of New Delhi to tilt at windmills where no wind exists and to go on fishing expeditions for illicit funds in the hope of stumbling onto some presumed cash hoard.

Singapore has been happy always to support India's economic rise. It is for India to reciprocate by making the overall investment climate more salubrious for foreign investors, including those from Singapore. Certainly, India should take pride in its huge and expanding market, but size itself might not be sufficient to draw in and anchor international support for its growth. On their part, investors from an island city-state have made their mark in large Asian countries such as China and Indonesia. The momentum of Singapore-India collaboration must be kept up.

Correction note: The story has been edited to clarify the names of the officials who inked the revised Avoidance of Double Taxation Agreement (DTA) in New Delhi recently.

A version of this article appeared in the print edition of The Straits Times on January 09, 2017, with the headline 'Resetting tax relations with India'. Print Edition | Subscribe