India and Singapore on 30 December 2016 signed the 3rd protocol for amending Double Taxation Avoidance Agreement (DTAA). This revisiting of the treaty is important as it will help the government in its efforts to eliminate black money from India.
The DTAA was signed or avoidance of double taxation as well as for prevention of fiscal evasion in relation to the taxes on income.
Features of the third Protocol amendment of the DTAA
• It will come to an effect from 1 April 2017.
• It provides for source-based taxation of capital gains arising on transfer of shares in a company.
• This amendment will help in curbing the revenue loss as well as in preventing double non-taxation. It will also streamline the slow of investments.
• During the two years called as transition period (from 1 April 2017 to 31 March 2019) the capital gains on shares will be taxed at half of normal tax rate (in source country), subject to fulfilment of conditions in Limitation of Benefits clause.
• It also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases.
• It enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion.
However, the amendment grandfathers all investments in shares made before 1 April 2017. The grandfathering will be subject to fulfilment of conditions in Limitation of Benefits clause as per 2005 Protocol.
The amendments are in line with India’s commitment under Base Erosion and Profit Shifting (BEPS) Action Plan. Base erosion and profit shifting (BEPS) refers to “tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations”. At present, over 100 countries and jurisdictions are collaborating to implement the BEPS measures.
The India-Singapore DTAA at present provides for residence based taxation of capital gains of shares in a company.
Earlier in 2016, India had amended DTAA with other countries like Cyprus and Mauritius. These double taxation avoidance agreements will block the routes to evade taxations.
Apart from this, to fight the menace of the black money, India had signed an Automatic Exchange of Information (AEOI) with Switzerland. Under AEOI, Switzerland will start giving real-time information on investments by Indian entities in the country in 2018 and subsequent years. The process will start in 2019.
Earlier on 10 May 2016, the two nations signed the protocol for amendment of the India-Mauritius Convention. Features of this amendment to the protocol
• It provides for source-based taxation of capital gains that arises due to the alienation of shares acquired from 1 April 2017 in a company resident in India.
• It says that the tax rate for all capital gains between the transition periods from 1 April 2017 to 31 March 2019 will be limited to 50 per cent of the domestic tax rate of India. But this benefit of 50 per cent reduction in the tax rate will be subject to the Limitation of Benefits Article.
• Taxation in India at full domestic tax rate will take place from the financial year 2019-20 onwards.
However, the amendment states that any and every investment made before 1 April 2017 will not be subject to capital gains taxation in India.
In addition to this, the two nations, namely India and Cyprus, on 18 November 2016 revised the DTAA. Features of the revision are
• It provides for source-based taxation of capital gains arising from the alienation of shares, instead of residence based taxation provided under the DTAA signed in 1994.
• The revision also provides for assistance for the collection of taxes and updates in between the two nation with the provisions related to Exchange of Information to accepted international standards.
However in this revision to the grandfathering clause was provided in case of investments that are made before 1 April 2017 in which the capital gains will be taxed in the country if which the taxpayer is a resident.