DTAA amendments with Singapore, Mauritius and Cyprus

• India has amended its over two-decade old tax treaty with Singapore that will allow it to tax capital gains on investments from the South East Asian nation, a significant milestone in plugging round-tripping of funds after changes to treaties with Mauritius and Cyprus.
• Short-term capital gains in India face tax at the rate of 15% while there is an exemption for long-term gains.
• Earlier DTAAs with the three countries gave complete exemption from payment of tax on profits made through capital gains as there was no such levy in the host countries. The beneficiary did not pay any capital gains tax in India.
• Singapore is the second-biggest source for foreign direct investment (FDI) into India after Mauritius, accounting for over 16% of cumulative inflows so far.

About DTAA:

• A DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-payers in these countries can avoid being taxed twice for the same income.
• A DTAA applies in cases where a tax-payer resides in one country and earns income in another.
• DTAAs can either be comprehensive to cover all sources of income or be limited to certain areas such as taxing of income from shipping, air transport, inheritance, etc.
• India has DTAAs with more than eighty countries, of which comprehensive agreements include those with Australia, Canada, Germany, Mauritius, Singapore, UAE, the UK and US.

Analysis:

• DTAAs are intended to make a country an attractive investment destination by providing relief on dual taxation. Such relief is provided by exempting income earned abroad from tax in the resident country or providing credit to the extent taxes have already been paid abroad. DTAAs also provide for concessional rates of tax in some cases.
• For instance, interest on NRI bank deposits attract 30 per cent TDS (tax deduction at source) here. But under the DTAAs that India has signed with several countries, tax is deducted at only 10 to 15 per cent. Many of India’s DTAAs also have lower tax rates for royalty, fee for technical services, etc.
• Favourable tax treatment for capital gains under certain DTAAs, such as the one with Mauritius, has encouraged a lot of foreign investment into India. Mauritius accounted for $93.65 billion or one-third of the total FDI flows into India between April 2000 and December 2015. It has also remained a favoured route for foreign portfolio investors. But the problem is DTAAs can become an incentive for even legitimate investors to route investments through low-tax regimes to sidestep taxation. This leads to loss of tax revenue for the country.

By: Vishal