The effective date for taxation of capital gains income by India aligns with the date of the coming into effect of the General Anti-avoidance Rule (GAAR). The Protocol is expected to rest the controversy with respect to applicability of Mauritius Tax Treaty benefits in the GAAR era; clarity in the context of the transition period is still required, considering that the dual conditions regarding expenditure as well as principal purpose and bona fide business test would need to be met.
It should be noted that the Protocol to the India-Singapore Tax Treaty (Singapore Tax Treaty) provides for a similar capital gains tax exemption which is co-terminus with the exemption in the Mauritius Tax Treaty. When this Protocol to the Mauritius Tax Treaty comes into effect, the position of investments coming in from Singapore will have to be evaluated, more specifically with respect to availability of Singapore Tax Treaty benefits to investments made by Singapore companies prior to April 1, 2017. The new Protocol to the Mauritius Tax Treaty also seems to provide source based taxation of "other income" and the actual text of the Protocol will throw light on the full impact of such changes.
To conclude, in a bold move, the Indian Government has grandfathered investments made till March 31, 2017, which is in line with their promise to not make any changes that may have retroactive effect. The long run impact will be felt by private equity and foreign institutional investors who pool in their funds in Mauritius. Tax exempt investors like pension funds, endowments and sovereign funds would have to evaluate the impact of the changes in their respective home jurisdictions.
Mukesh Bhutani, managing director of BMR Advisors, responded to related questions which could arise on account of this contemplated change in the Mauritius Tax Treaty are as follows:
Given that the capital gains exemption will not be available under the Mauritius Tax Treaty on sale of shares of an Indian company acquired from April 1, 2017, would the benefits under the Singapore Tax Treaty also fall away?Article 6 of the Protocol dated July 18, 2005 to the Singapore Tax Treaty provides that the benefits on capital gains exemption under the Singapore Tax Treaty would remain in force only till the time Mauritius Tax Treaty provides for capital gains exemption on alienation of shares. Accordingly, the benefits accorded under the Singapore Tax Treaty in this regard would fall away, unless amended.
From when would the capital gains exemption under the Singapore Tax Treaty fall away, immediately on notification of the Protocol or from April 1, 2017?Given that the Mauritius Tax Treaty benefits on alienation of shares would be available until March 31, 2017, even the Singapore Tax Treaty benefits for similar transfers should be available until March 31, 2017, but a clarification in this regard will help.
Whether the grandfathering provisions (in respect of capital gain on sale of shares acquired prior to April 1, 2017) also be available under the Singapore Tax Treaty?In our view, the Government of India should come up with a level playing field for investments from Mauritius and Singapore and avoid any arbitrage between jurisdictions. Accordingly, the grandfathering provisions should also be built in the Singapore Tax Treaty. However, one will have to wait and watch the diplomatic discussions between India and Singapore in this regard.
Whether the transition provisions (in respect of capital gain on sale of shares acquired on or after April 1, 2017 and exited on or before March 31, 2019) and the corresponding lower rates of taxation during this period, also be available under the Singapore Tax Treaty?In our view, the same should be made available subject to explicit agreement between India and Singapore in this regard.
Would the original Articles 13(4), 13(5) and 13(6) of the Singapore Tax Treaty be reinstated in their original form?[Article 13(4) provided that capital gain on sale of shares in a company deriving its value (directly or indirectly) from immovable property in India would be taxable in India. Article 13(5) provided that capital gain on sale of shares in an Indian company would be taxable in India. Article 13(6) provided that capital gain on sale of any other asset not covered in any of the previous Articles [13(1) – gain on immovable property, 13(2) – gain on movable property forming part of PE, 13(3) – ships and aircrafts, 13(4) – gain shares deriving value from immovable property in India and 13(5) – gain on shares in an Indian company] would be taxable only in the state of residence (Singapore).]
Paragraph 4 of Article 13 of the Singapore Tax Treaty replaced the earlier paragraphs 4, 5 and 6 of Article 13. Accordingly, it is likely that the erstwhile paragraphs 4, 5 and 6 will now be re-instated for paragraph 4 of the Singapore Tax Treaty. In such case, only capital gains arising from alienation of shares which derive value from immovable properties situated in India or shares of an Indian company would be taxable in India; capital gains arising on other securities such as convertible debentures, futures and options etc should not be subjected to income-tax in India.
Will a subsequent agreement with the Singapore Government be required to be reached to give effect to above?Any tax treaty is bilateral agreement and hence, an amended agreement will need to be reached with the Singapore Government. This said, the Singapore Government should be open to accede to requests from the Indian Government given that the existing Singapore Tax Treaty in its current form may not be attractive from an investor standpoint.
Is there any plan to amend tax treaties with other jurisdictions that still provide favourable capital gain tax treatment e.g. Cyprus and Netherlands?One will have to wait and watch the diplomatic discussions between India and other countries in this regard along with developments on the G20 and BEPS commitment by India.
