Recently
India & Singapore have amended a decade old double tax avoidance agreement
(DTAA) to allow the income tax department to impose tax on capital gains (tax)
on investments routed through island nation & avert misuse of benefits.
Earlier,
Government of India managed to get Mauritius and Cyprus to amend tax treaties
to impose capital gain tax & avoid round-tripping of funds into the country
some of which was said to be black
money.
The
above measures aim to reduce revenue loss, prohibit double non-taxation,
consolidate the flow of investment and also trigger the interchange of
knowledge between the two countries. It is also anticipated to reduce
unpredictability in the market, by possibly intimidating non serious investors.
Such amendment shall tackle the long pending issues of treaty abuse & round
tripping of funds
Source
based taxation approach will certainly have an impact on foreign investments
from Mauritius, Cyprus & Singapore as investments will now have to factor
in the capital gains tax. This amendment will bear a brunt on prospective
investments transmitted in India. These amendments have brought in much more
lucidity to the existing provisions thereby boosting confidence in investment
related decisions. From this viewpoint, this amendment is indeed a much
required one.
Considering
that Governments globally are taking various actions against treaty abuse
provisions and also implementing various Base Erosion and Profit Shifting
(BEPS) initiatives, this is a move for better tax transparency and administration.
However,
there are still some issues on account of this amendment that needs stringent
evaluation. Some of the issues which needs clarity area as follows:
Currently,
only shares are covered under the capital gains withdrawal. Compulsorily
Convertible Debentures (CCDs) have not been dealt with. Thus, would a transfer
of a CCD then result in capital gains? In order to claim grandfathering
provisions, does it imply, the CCDs should be converted to shares before 31
March 2017 to be eligible for the exemption.
The
bigger issue pertains to participatory notes or P-notes as they are popularly
known. According to media reports, around 30 to 50% of the P Notes money is
routed through ETF (exchange traded funds). Taxing ETF will impact liquidity in
the market and probably make the investors shift to Singapore exchange to buy
Nifty.
Another
important aspect that should be kept in mind is that India proposes to
introduce General Anti-Avoidance Rules (GAAR) effective 1 April 2017.
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