Singapore Tax Treaty A Saviour For Legitimate Businesses
Singapore being a sizeable and substantial financial centre in the Asia-Pacific region, occupies a key place in India's external economic engagement and the Act East Policy. India and Singapore have a number of strategic partnerships. Singapore is also the second largest source of FDI in India with investments amounting to $50.6 billion, or about Rs. 3.5 lakh crore, between April 2000 and September 2016.
When we look at the development and employment prospects of an economy such as India, perhaps it is not an exaggeration to point out that for business to thrive, the efforts of both economies need to converge. However, this cannot be a reason for India to turn a blind eye to tax evasions. Owing to the latest revision in the Singapore tax treaty, nobody is permitted to skirt taxes on capital gains. This comes across as the Centre's way to tighten the noose on round tripping and black money.
Ever since, two opinions are floating in the market. What does it mean for the Indian economy? Would Singaporean companies still find it profitable to invest in India?
With announcements regarding Smart Cities mission around the corner, India did see a development mentor in Singapore. Even Singapore realised that India is a difficult-to-ignore market where they could put in money to provide solutions related to energy, environment, ICT, buildings and governance. Some Singapore companies have about 30 per cent business in India. The amended treaty guidelines could deter some amount of investment in the country but it would mean more revenue in the government coffers. For those working in these companies, this may even be a time where they might be planning on relocating and job hops for a more secure tenure at one's workplace.
However, the good news is that legitimate businesses have no reason to worry. Owing to concessions and domestic tax rates, the headquarters of most MNC's would have preferred Singapore as the base. Regional headquarters of these companies handled the management end or as transactional hubs. Tax issues have definitely been a concern. The revised amendment makes sure that the Indian tax authorities will now call in for a tax deduction owing to the gains that the company makes in the country. This brings foreign investors and the domestic ones on a more level playing ground.
Will there be a sudden capital flight? No, and this is good news. Shares acquired before April 1, 2017, would remain taxed only in the resident state.
Here's what has been amended-
Before April 1, 2017
- Remain taxable only in the residence State of the alienator
- Subject to specified conditions including expenditure on operations of the alienator in its residence State of at least S$2 lakh in Singapore or Rs 50 lakh in India, as the case may be, for each of the 12-month periods in the immediately preceding period of 24 months from the date on which the gains arise
- Status quo prevails
(b) On or after 1 April 2017 (For gains that arise during the period April 1, 2017 to March 31, 2019)
- Tax rate imposed on such gains will be limited to 50 per cent of the tax rate applicable on such gains in the State in which the company whose shares are alienated is a resident.
- Subject to specified conditions including expenditure on operations of the alienator in its residence State of at least S$2 lakh in Singapore or Indian Rs50 lakh in India, as the case may be, for the immediately preceding period of 12 months from the date on which the gains arise
For gains that arise after March 31, 2019
- Will be taxable in the State in which the company whose shares are alienated is resident
Business desk analysts in Singapore feel that post-demonetisation, property rates have slashed across major cities and this may be an opportune time for foreign investors to consider luxury property in Tier 1 cities. These analysts are hoping for a price discount of anywhere between 15-30 per cent. However, keeping the current scenario in mind, while it is true that developers are considering negotiations, the buyer is still in a wait and watch mode. Post-RERA and GST, prices may even increase. Hence, a 30 per cent rate cut is a miscalculation although one can surely consider India as a clean and safe place to park one's money.
The Enforcement Directorate is also stringent about money laundering and dubious currency transactions within the country and slaps notices to NRIs for parking funds in NRE accounts and buying properties. So if property purchases were a way of parking unaccounted money into real estate, the government has said no to it too.
Do note that rental income from a property in India is understood as being accrued from India and is taxable. However, if the total taxable income falls under the limit of Rs 2.5 lakh, it is not taxable. Various deductions are also available, for example, those on pre-construction loans, repairs, renewal etc.
A common tax system is always a better way to understand prevalent tax bases and nuances. It also puts away any chance of confusion. Similar treaties have already been signed with Mauritius, Cyprus and most recently, Kazakhstan.