The Government of India amended its double taxation avoidance agreement (DTAA) with Singapore on December 30, 2016. The amendment allows the Government of India to levy source-based capital gains taxes on foreign direct investment (FDI) from Singapore. Before the amendment, the DTAA only permitted residence-based taxation on capital gains derived from FDI into India. Therefore, the DTAA prohibited the Indian Government from levying capital gains taxes on FDI from Singapore.
The amendment of the DTAA with Singapore follows the Government of India amending similar DTAAs with both Mauritius and Cyprus in May and September of 2016, respectively. Investment from Singapore accounted for $50.6 billion (16%) of the total FDI into India from April 2000 to September 2016—trailing only Mauritius in the amount of FDI.
The amendment of the DTAA with Singapore is part of the Indian Government’s overall plan to decrease corruption by eliminating “round-tripping.” Round-tripping involves Indian investors funneling money to a country that holds a favorable tax treaty with India and then re-using the money as FDI into India. If successful, the Indian investor would avoid paying capital gains taxes on the investment. India’s Minister of Finance Arun Jaitley stated, “[With the amendment of the DTAAs with Mauritius, Cyprus, and Singapore] we have successfully stopped round tripping through this route.”
The amendment of the Singapore DTAA mirrors the Mauritius DTAA amendment and provides a two-year transition period regarding source-based capital gains treatment. Singapore-based investors may transfer any shares of an Indian company acquired before April 1, 2017 at any time without incurring Indian capital gains taxes. The amendment designated the period from April 1, 2017 to April 1, 2019 as the transition period. Any shares of an Indian company acquired during the transition period and transferred before the end of the transition period incur taxes at 50% of the capital gains rate in India. Any shares acquired during the transition period that are transferred after the end of the transition period incur taxes at the full capital gains rate in India. Lastly, any shares acquired after the transition period and transferred after the transition period incur taxes at the full capital gains rate in India.
Overall, the amendment of the Singapore DTAA could result in increased tax liabilities for foreign direct investors in India. India is now permitted to levy source-based capital gains taxes on FDI from Singapore, Mauritius and Cyprus. However, the transition period allows foreign direct investors to make timely divestment decisions in order to mitigate the amendment’s overall tax impact. Furthermore, U.S. taxpayers affected by the amendment may be eligible to receive a foreign tax credit to further mitigate the amendment’s tax impact.
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