As expected, the taxation of capital gains in the amended India-Singapore tax treaty is similar to the taxation of capital gains under the amended India-Mauritius tax treaty. However, the threshold expenditure in the revised LOB clause has not been reduced. A lower threshold is provided in the LOB clause of the amended India-Mauritius tax treaty, giving a slight advantage to Mauritius on this aspect.
Further, since the amended tax treaty does not alter the withholding tax rate of 10% and 15% on interest income, it could provide a definitive advantage to Mauritius and it could emerge as a preferred jurisdiction for routing debt investments into India as the amended India-Mauritius tax treaty provides for only a 7.5% withholding tax rate on interest income.
The amended tax treaty permits application of domestic laws for the prevention of tax avoidance/evasion over the tax treaty provisions. Accordingly, it appears that the provisions of General Anti-Avoidance Rule (GAAR) (proposed to be effective in India from 1 April 2017) may be invoked by India in case of the amended tax treaty, even though the treaty already has a specific anti-abuse provision in form of the LOB clause. Such a specific provision permitting application of domestic anti-avoidance law over the tax treaty provisions is not inserted in the amended India-Mauritius tax treaty. However, this fact should not mean that the Indian authorities cannot invoke GAAR in the case of amended India-Mauritius tax treaty.
However, providing relief from economic double taxation by permitting corresponding adjustments in transfer pricing cases is a welcome step and is in line with Article 17 of the Multilateral Convention of the OECD under the Base Erosion and Profit Shifting (BEPS) Project.
Singapore has been a preferred jurisdiction for investment in India for Foreign Direct Investment (FDI) and Foreign Portfolio Investors (FPIs) considering the exemption from tax in the case of capital gains under the existing tax treaty. However, since these investors will now need to pay tax in India on capital gains arising from the alienation of shares of an Indian company acquired on or after 1 April 2017, the tax cost of such investors will now increase. Accordingly, all businesses/investors who have operations in India through a Singapore entity may need to revisit their structures in India before 31 March 2017 to maintain the tax efficiency obtained till date.