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 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.
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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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