India on Friday signed a third protocol with Singapore to amend the bilateral double taxation avoidance agreement, in a move to check tax evasion.

The amendment, which is in line with the revised pacts with Mauritius and Cyprus, would allow India to levy capital gains tax on investments coming from Singapore from April 1, 2017.

‘Grandfather’ clause

“It provides for source based taxation of capital gains arising on transfer of shares in a company. All investments before this will be grandfathered for a period of two years, that is till March 31, 2019,” said Finance Minister Arun Jaitley.

During the two-year transition period between 2017 to 2019, capital gains tax will be imposed at 50 per cent of the prevailing domestic rate on shares, subject to the limitation of benefits (LOB) article.

From April 1, 2019, the full tax rate will be applicable.

“This will curb revenue loss, prevent double non-taxation and streamline the flow of investments,” said the Finance Ministry statement.

Earlier on May 10 this year, India amended its DTAA with Mauritius to allow India to impose capital gains tax on shares sold in Indian companies post April 2017. Since the Singapore treaty was co-terminus with that of Mauritius, it had to be similarly amended.

Plugging another major tax loophole, India had also reworked its tax pact with Cyprus on November 18.

‘Historic year’

Calling 2016 a “historic” year, Jaitley said that all three tax pacts that provided for an evasion friendly route for round trippers has now been blocked.

The DTAAs provided that that there would be no capital gains tax in India for investors coming in through Mauritius, Singapore and Cyprus as they would be liable to pay tax in these jurisdictions. However, these countries did not levy a capital gains tax. Investors till now had been taking shelter under these three tax pacts to avoid paying capital gains tax in the India for transfer or sale of assets in the country.

Not surprisingly, Mauritius and Singapore have been the top foreign direct investors to India. Of the total FDI inflows of $29.4 billion in April-December 2015-16, Mauritius and Singapore accounted for $17 billion.

A recent report by PHDCCI and KPMG also pegged Singapore as the top foreign investor into India in 2015016 with total FDI of $13.69 billion.

Closing another major tax loophole, India has also signed a pact with Switzerland for information sharing. Switzerland will begin sharing with India from 2019 information on all investment or accounts maintained in its banks post-2018, Jaitley said.

Tax experts said investors were expecting a reworking of the India-Singapore tax pact as it is in sync with the focus on GAAR and BEPS.

“It remains to be seen whether the existing limitation of benefits clause will continue to apply for the two-year phase out period, or whether there will be a somewhat diluted requirement,” said Abhishek Goenka, Partner, Direct Tax, PwC, adding that it is also not clear whether there is a reduction in the rate of withholding tax on interest to 7.5 per cent, like in the case of Mauritius.

Girish Vanvari, National Head of Tax, KPMG, also raised the issue of withholding tax and said it would be an important watch point for investors from Singapore investing through debt instrument.

“All eyes now on what is the final take on the withholding rate of interest under the revised India- Singapore treaty in the fine print,” he said.

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