India and Singapore signed a Third Protocol on December 30, 2016, for amending the Double Taxation Avoidance Agreement (DTAA) for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income.
- The decision follows India’s treaty policy to prevent double non-taxation, curb revenue loss and check the menace of black money through automatic exchange of information.
- India signed a similar Pact with Mauritius in 10th May, 2016 and Cyprus on 18th November, 2016 to stop round-tripping of black money via the three countries, Mauritius, Cyprus and Singapore, which earlier had no cap on capital gains.
Highlight of Amended DTAA
The Third Protocol amends the DTAA to provide for source based taxation of capital gains arising on transfer of shares in a company. Presently the DTAA provides for residence based taxation of capital gains of shares in a company.
- The amended DTAA would come into effect from 1st April, 2017. It will help to curb revenue loss, prevent double non-taxation and streamline the flow of investments.
- However, the investments made in shares before 1st April, 2017 have been exempted and will not be subjected to capital gains taxation in India, subject to fulfillment of conditions in Limitation of Benefits clause as per 2005 Protocol.
- Further, a two year transition period from 1st April, 2017 to 31st March, 2019 has been provided during which capital gains on shares will be taxed in source country at half of the domestic tax rate.
- However, the benefit of 50% reduction in tax rate during the transition period shall be subject to the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.
- The Third Protocol also includes provisions to facilitate relieving of economic double taxation in transfer pricing cases.
- This is a taxpayer friendly measure and is in line with India’s commitments under Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases.
- The Third Protocol also enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion.
Joint Declaration for fighting Black Money
Fighting the menace of Black Money deposited in Singapore’s accounts has been a key priority area for the Government.
- To achieve this goal, a ‘Joint Declaration’ for the implementation of Automatic Exchange of Information (AEOI) between India and Switzerland was signed in November, 2016.
- The Declaration would now make it possible for India from September, 2019 onwards, to receive the financial information of accounts held by Indian residents in Switzerland for 2018 and subsequent years, on an automatic basis.