India inks revised DTAA with Singapore to check round-tripping

India today 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 from April next to check round-tripping of funds, after rolling back similar benefits to Mauritius and Cyprus.

India had in May this year signed a revised tax treaty with Mauritius, triggering a change in the Double Taxation Avoidance Agreement (DTAA) with Singapore.

Mauritius and Singapore are among the top sources of foreign direct investments into India and also account for a big chunk of total inflows into the country's capital markets.

Under the amended treaty with Singapore, for two years beginning April 1, 2017, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate. Full rate will apply from April 1, 2019, Finance Minister Arun Jaitley said.

"This year on May 10 we had amended DTAA with Mauritius. Then in September we amended with Cyprus and today we amended the DTAA with Singapore," he said.

"With these three... we have successfully stopped round tripping through this route."

Of the total FDI inflows of USD 29.4 billion in April- December 2015-16, Mauritius and Singapore accounted for USD 17 billion.

Jaitley said the earlier DTAAs with the three countries gave complete exemption from payment of tax on profits made through capital gains as there was no such levy in the host countries. The beneficiary did not pay any capital gains tax in India.

"Therefore there was a reasonable apprehension that these agreements were misused for round tripping and bringing money back in country through this route," he said, adding 2016 has been significant and historic in getting these amended.

Through the revision in the treaty, "we have given a reasonable burial to the black money rule that existed," he said.

The Finance Minister said like the Mauritius pact, all investments will be grandfathered till March 2019. "Capital gains liability will be shared half and half and after that entire capital gain will come to India," he said.

Also, Switzerland will begin sharing with India from 2019 information on all investment or accounts maintained in its banks post-2018.

The CBDT had signed an agreement to this effect with Switzerland about two months back, he said.

These are "milestone in campaign against tax evasion and parking of money outside country," he said. "2016 has been historic as three DTAAs have been rewritten."

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".

Short term capital gain tax is levied at 15 per cent in India, while long term capital gain tax is zero.

As per the revised treaty, investments made prior to April 1, 2017, will be protected from new tax provisions.

While Mauritius was the single biggest source of foreign direct investment into India in 2014-15, accounting for about 24 per cent of USD 24.7 billion FDI, Singapore accounted for 21 per cent.

The taxation treaties with these nations is said to have been misused by many Indian and multinational companies to avoid paying tax or to route illicit funds.

India has been insisting on review of the treaties as it felt a chunk of the funds were not real foreign investment but Indians routing money through these nations to avoid domestic taxes, a practice known as "round tripping".

It wanted to ensure firms in the two nations that invest in India are not just 'shell' companies but instead have substantial operations there, such as paying staff, before qualifying for treaty terms of getting exemption from payment of capital gains tax in India.

India and Singapore today signed a Protocol to amend their bilateral Avoidance of Double Taxation Agreement. The Protocol was signed between Lim Thuan Kuan, Singapore's High Commissioner to India and Sushil Chandra, Chairman of the Central Board of Direct Taxes.

"Singapore and India have reached agreement to phase out the capital gains tax exemption gradually, and have also committed to find new ways to promote bilateral investments," a statement issued by Ministry of Finance of Singapore said.

The revised pact preserves the existing tax exemption on capital gains for shares acquired before April 1, 2017, while providing a transitional arrangement for shares acquired on or after that date.

"For shares acquired on or after April 1, 2017, there will be a two-year transition period, during which the 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," the statement said.

Jaitley and visiting Singapore Deputy Prime Minister Tharman Shanmugaratnam 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 2017, it added.