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Rakesh Dharawat |
Hari Gangadharan |
Revision of India-Singapore Tax treaty
In a significant development, a third protocol (Protocol),
amending the provisions of the India-Singapore tax treaty was
signed in December 2016. The changes brought about by the
Protocol are largely similar to the revised India-Mauritius tax
treaty.
Under this Protocol, India will get the right to tax capital
gains arising on alienation of shares acquired on or after
April 1 2017. Shares acquired before March 31 2017 will be
grandfathered and gains arising thereon will not taxable in
India. For shares acquired and alienated between April 1 2017
and March 31 2019 the tax rate will be limited to 50% of the
tax rate applicable in the source country.
To be eligible for the grandfathering or concessional tax
rate during the transitory period, certain conditions specified
by the limitations on benefit (LoB) clause have to be met by
the company claiming the benefit. These include incurring an
annual operating expenditure of at least S$200,000 ($140,000)
or INR 5 million ($73,000) as the case maybe in the immediately
preceding period of 12 months from the date on which the gains
arise.
The benefit of reduced tax rates will not be available if
the affairs are arranged with the primary purpose of benefiting
from the grandfathering clause, or to take advantage of the
provisions granting the reduced tax rate, or if the company
claiming the benefit is a shell or a conduit company. A shell
or a conduit company means any legal entity that is not listed,
has negligible/nil business operations, or carries on no real
and continuous business activities.
The Protocol provides that the tax treaty will not prevent a
country from applying its domestic law and measures concerning
the prevention of tax avoidance or tax evasion. It also seeks
to provide for bilateral discussions for the elimination of
double taxation arising from transfer pricing or the pricing of
related party transactions.
De-notification of Cyprus as a 'notified jurisdictional
area'
The notification issued in 2013 that classified Cyprus as a
'notified jurisdictional area' (NJA) under section 94A of
India's Income-tax Act, 1961 was withdrawn in November
2016.
Thus, transactions with Cyprus will no longer attract
transfer pricing, or a higher withholding of 30% as
contemplated by section 94A.
It is also provided that this repeal has retrospective
effect from the date of the 2013 Notification. However,
transactions done, or omitted to be done, before the
cancellation are expressly saved.
This repeal comes in the backdrop of the revision of the
India-Cyprus tax treaty to provide for source-based taxation of
capital gains in India (subject to a grandfathering of pre-2017
investments).
Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com)
and Hari Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)
Dhruva Advisors
Tel: +91 22 6108 1000
Website: www.dhruvaadvisors.com