Singapore has put India in a bind over the proposed Double Taxation Avoidance Agreement (DTAA) between the two by seeking capital gains exemption for entities registered in Singapore.
Even as India is trying to plug loopholes in its tax agreement with Mauritius to prevent treaty shopping, Singapore has sought dilution of the India-Singapore protocol to get similar benefits. India is resisting the move since it does not want entities from third countries to take advantage of the concessions provided to Singapore.
During recent consultations, Singapore sought amendments to the DTAA with India to allow trusts to be covered under the treaty so that they can enjoy capital gains exemption. The Singapore government has also sought upfront comfort to investors for claiming capital gains tax exemption.
If India allows trust to be covered under the agreement, any trust registered in Singapore whose beneficiaries are not citizens of Singapore can also benefit, highly-placed government sources said, explaining why the move is being resisted by the Indian side.
Officials feel that accepting Singapores demand would make it difficult for India to plug the abuse of the tax treaty with Mauritius. Currently, India is in consultation with Mauritius to introduce anti-abuse clauses in the DTAA between the two countries, sources told ET.
Singapore is keen to gain from the Comprehensive Economic Cooperation Agreement (CECA) with India by obtaining capital gains exemptions for its entities through a revised DTAA. As of now, Mauritius happens to be the only country to enjoy such a benefit, though Singapore pipped it to the post on inking CECA with India.
The Prime Ministers Office (PM) held a review of the demands made by Singapore, during a consultation with various government departments earlier this month. The department of revenue expressed reservations during the consultations. Accepting Singapores demands completely could open a can of worms on the lines of India-Mauritius treaty, officials of the department feel.
India is likely to give a counter proposal to Singapore which will address Singapores concerns while preventing the misuse of the facility by any third-party resident. Official consultations between the representatives of the two countries are on this week.
While New Delhi is willing to concede to Singapores demand of allowing trust to be covered under the DTAA, it wants adequate provisions which will ensure that only a trust registered in Singapore will benefit. Also, the trustee or beneficiary must be a Singapore resident. Sources said Singapore has sought certainty on capital gains exemption, arguing that this would lead to improved flow of investments into India.
Enough investments could not flow from there into India due to the absence of such a guarantee, Singapore officials said. On Indias part, offering such an open-ended window can lead to misuse of the treaty. Therefore, officials feel that riders are mandatory in case comfort is provided to Singapore-based investors.
Singapore wants New Delhi to liberalise the limitation of benefit clause by deleting para 1 of article 3 of the bilateral protocol. Officials of the revenue department are willing to amend it, but are not in favour of scrapping it.
A resident of a contracting state shall not be entitled to the benefits of Article 1 of this Protocol if its affairs were arranged with the primary purpose to take advantage of the benefits in article 1 of this protocol, para 1 says.
India amendment offer reads as follows: Where the tax authority of a contracting state is satisfied that the purpose or effect of any arrangement made by a resident of the other contracting state is directly or indirectly to reduce the tax incidence of any tax which is payable by or which would otherwise have been payable by such resident, such tax authority may, notwithstanding the provisions of article 1 of the protocol, deny the benefits of that article.
Article 1 provides that gains derived by residents of contracting state Singapore from alienation of any property shall be taxable only in Singapore. This counter proposal will ensure that the India-Singapore DTAA does not become as open-ended as the India-Mauritius tax treaty and gets misused.