India-Singapore Double Tax Treaty
The Avoidance of Double Taxation Agreement (DTA) between Singapore and India came into effect in 1994. The provisions of this agreement were modified by a protocol signed on June 29, 2005. Its second protocol was signed on June 24, 2011 coming into force on September 1, 2011. The DTA agreement eliminates the double taxation of income between Singapore and India and reduces the overall tax burden of the residents of both countries.
- In 2020, the Indian government has launched several tax reforms aimed at reviving the country's economy and improving the investment climate. The most noteworthy measure in the Union Budget for 2020–2021 is the withdrawal of the Dividend Distribution Tax (DDT) — the tax paid by the dividend payer. Instead, from now on, dividends will be taxed in the hands of the recipients, i.e. shareholders of the dividend distributing company. Given the preferential tax treatment of dividends in the Singapore-India tax treaty, the introduction of the new dividend tax regime creates an outstanding opportunity for substantial tax savings by making a Singapore company shareholder of an Indian company.
ountries around the world enter into various tax treaties. These treaties are beneficial to the residents (business entities as well as individuals) of the countries who are parties to the agreement. They can provide tax exemptions, tax credit, and an overall reduction in the tax rates. Singapore has entered into DTAs with numerous countries. These agreements contribute to the efficiency of Singapore’s tax system. This article will highlight the important provisions of the India-Singapore DTA, the tax applicability, the tax rates, the scope of the agreement, and advantages of this DTA.
The Double Taxation Avoidance Agreement (DTA) between India and Singapore is a tax treaty between two countries to avoid the double taxation of income that may flow between the two countries.
Without the DTA, such income is liable to be double taxed i.e. two countries levy their own tax on the same income. This double taxation unfairly penalizes income flows between the countries and thereby discourages trade and commerce between the countries.
To address this problem and to reduce the overall burden of a taxpayer, Singapore and India signed the DTA. Pursuant to the signing of the agreement, any income that is taxable in both the countries will be taxable only in one country according to the terms of the DTA.
Scope of the Agreement
The India-Singapore DTA is applicable to the residents (legal entities and individuals) of the signing states i.e. India and Singapore.
Types of taxes covered
The following types of taxes are covered in the DTA agreement
- In India
- Income tax including any surcharge,
- Capital gains tax
- In Singapore
- Income tax
- Capital gains tax
The state where the income is taxed
The DTA specifically states where the different types of income of a resident of either Singapore or India will be subject to tax (see below). This is important since the country where the income is taxable will determine the tax rate applicable.
The DTA states the kinds of income that may arise and the tax rate applicable (see below). For example, in the case of royalty income, the tax rate in the DTA is 10%. This implies that if a taxpayer resides in Singapore and receives a royalty from India, the tax rate on the income will be 10%. This is important since the rates in the DTA agreed by the countries and the corresponding prevailing tax rates of the country can differ.
Key provisions of India and Singapore DTA
The key provisions of the India-Singapore DTA include:
- Business Profits
According to the DTA, the profits of an enterprise are taxable only in the state where the business operations are carried out. If a Singapore-based business has a permanent establishment in India, the profits attributable to the permanent establishment will be taxed only in India.
In case Singapore and India did not have a DTA in force, the profits of the business could be taxed in Singapore as well as in India. The profits generated by the permanent establishment would bear the tax burden twice in such a case. This highlights the importance of the DTA and how it avoids double taxation of business profits.
- Interest, Royalty, and Dividend
The DTA specifies the rates applicable in the case of income from interest, royalties, dividend etc. Generally, the tax rates in the DTA are lower than the prevailing tax rates in the countries that are parties to the agreement.
Without the treaty, the withholding tax rate in Singapore for any interest paid to non-residents is 15% whereas in India the rate ranges from 5 – 20% (depending on the type of interest) plus surcharge and cess. Under the DTA the tax on interest is as follows:
- 10% of the gross amount, if interest is paid on the loan which is granted by a bank carrying on banking business or any such financial institution.
- 15% of the gross amount in all other cases.
Without the treaty, the withholding tax rate in Singapore for any royalties paid to non-residents is 10% whereas in India the withholding tax rate for any royalty paid to non-residents is 10% plus surcharge and cess. Under the DTA, the tax rate for royalties is 10-15% depending on the kind of royalty paid to non-residents.
Prior to April 1, 2020, India did not levy any withholding tax for dividends. However, the company paying dividends bears a dividend distribution tax (DDT) of 15% (plus surcharge and cess) when paying the dividend to its shareholders. The recipient shareholder is exempt from paying any tax on dividend. Thus, in India, the shareholders today pay no tax on dividends but the company pays a tax.
From April 1, 2020, India has abolished the DDT and the dividends will be taxed in the recipient’s hands. Instead, India has introduced a dividend withholding tax. The rate will be 10% for dividends paid to shareholders resident in India and 20% if paid to foreign investors (the India-Singapore DTA reduces this rate to 10 or 15% as described below).
In Singapore, dividend distributions by a company are tax-free. Additionally, the recipient shareholder is also exempt from tax on dividend income.
The India-Singapore DTA states that dividend income is taxed in the recipient’s state of residence as follows:
- 10% if the recipient company holds a minimum of 25% of the shares of the company paying dividend and
- 15% in all other cases.
The introduction of the new dividend tax regime by India creates an outstanding opportunity for substantial tax savings by making a Singapore company a shareholder of an Indian company. This can be very beneficial to both foreign and Indian shareholders. For more on this, see our blog post Singapore benefits from India’s new dividend tax policy.
- Capital Gains
Article 13 of The DTA specifies the state in which capital gains are subject to tax. Another important aspect of the India-Singapore DTA is the limitation of the benefits clause that was introduced in the protocol signed between the countries in 2005.
Limitation of Benefits Clause
In 2005, the India-Singapore DTA was amended. The amendment provides that any capital gains that arise on the sale of property or shares are taxable only in the country where the investor resides. This amendment proves beneficial to Singapore since the country does not levy any tax on capital gains. For instance, if a resident of Singapore sells shares of an Indian company, it will be exempt from capital gains tax both in India and Singapore. This is a very significant tax benefit of the DTA that is designed to encourage investment in India from Singapore-based businesses and companies.
However, to avoid the misuse of this exemption especially by third-country residents who establish holding companies in Singapore to avail the capital gains exemption, the treaty added a “Limitation of Benefits (LOB)” clause. Under this clause, a Singapore incorporated company will not be entitled to the exemption from capital gains if the sole purpose of the establishment of the company was to avail of this benefit. Additionally, companies that have negligible business operations in Singapore, with no continuity in business activities will not be entitled to this benefit. As a result of the LOB clause, the agreement is not applicable to shell companies.
What is a Shell company?
A shell company is a legal enterprise which is “resident” of either Singapore of India but has negligible business operations in the state with no continuous business activities. According to the India-Singapore DTA, a resident of either of the countries will be a shell company if in the immediately preceding 24 months from the date when the gains arise to the company, the total annual expenditure on its operation:
- Is less than S$200,000, if it is a Singapore company, or
- Is less than Rs 50,00,000, if it is an Indian company.
According to the third protocol signed on December 30, 2016 that amends the DTA:
- Shares acquired before April 1, 2017 must fulfill the LOB conditions for each of the 12-month periods in the immediately preceding period of 24 months from the date on which the gains arise.
- Shares acquired between April 1, 2017 up to March 31, 2019 must fulfill the LOB conditions for the immediately preceding period of 12 months from the date on which the gains arise.
- The protocol does not currently state the LOB conditions that have to be fulfilled for shares acquired after March 31, 2019.
Capital Gains on Sale of Shares – Amendment on December 30, 2016
- The existing provisions will continue to apply to capital gains from the sale of shares acquired before April 1, 2017. For example if you reside in Singapore, capital gains on the sale of shares acquired in an Indian company before April 1, 2017 will not be taxable in India.
- Capital gains from the sale of shares acquired in a company from April 1, 2017 up to March 31, 2019 will be taxed in the country where the company is a tax-resident at a rate of 50% of the capital gains tax rate applicable in that country. For example, consider a Singapore resident who acquires shares in an Indian company on April 2, 2017. When this person sells these shares, the capital gains will taxable in India at a rate of 50% of the applicable capital gains tax rate in India. Note that the 50% rate is applicable only on capital gains arising from the sale of shares acquired in a company during the two-year transition period from April 1, 2017 to March 31, 2019.
- Capital gains arising from the sale of shares acquired in a company on or after April 1, 2019 will be taxed in the country where the company is a tax-resident. For example, if you reside in Singapore, capital gains on the sale of shares acquired by you in an Indian company after March 1, 2019 will be taxed at the full capital gains tax rate applicable in India at the time the sale.
Prior to this amendment, the India-Singapore DTA stated that the capital gains on the sale of shares were to be taxable only in the country where the investor resides. However, the third protocol to the DTA outlines the following changes:
There is a very beneficial implication of these changes to Indians who wish to invest in Singapore companies. Since Singapore does not levy any capital gains tax, the capital gains that arise from the sale of shares of a Singapore company by an Indian resident will not be subject to taxation. This is a major benefit for Indian investors or entrepreneurs who are looking to expand their business overseas by making investments and incorporating in Singapore.
It is important to note that the change in the treatment of capital gains taxation is limited only to gains arising from the sale of shares. Capital gains on any other type of property will be taxable in the country where the investor resides as before.
Amended Capital Gains Tax Treatment – Summary
|Shares acquired||Capital Gains Tax on Sale of Shares||Rate of Tax|
|Before April 1, 2017||Taxed in the country where the investor resides||100% of the capital gains tax rate|
|Between April 1, 2017 – March 31, 2019||Taxed in the country where the company is a tax-resident||50% of the capital gains tax rate|
|After March 31, 2019||Taxed in the country where the company is a tax-resident||100% of the capital gains tax rate|
- Associated Enterprise The third protocol to the India-Singapore double tax treaty introduced Article 9(2) which states that any transfer pricing dispute between India and Singapore will either be resolved through a Mutual Agreement Procedure (as explained in Article 27 of the treaty) or through Bilateral Advance Pricing Agreements (APAs). India and Singapore will enter into bilateral discussions for the elimination of double taxation arising from transfer pricing. Once both the countries enter into bilateral APAs there will be greater certainty on the transfer pricing method.
You may also be interested in reading our comprehensive guide on business scenarios in which a Singapore company-based structure can be useful for Indian citizens and businesses.
DTA – At A Glance
The DTA specifically states where the different types of income of a resident of either Singapore or India will be subject to tax. The following table states the type of income or payments made and the state where the income is taxed. This is important since the place of taxation will determine the rate of tax applicable to that type of income under the DTA.
|Types of Income/Payments||Where is the income taxed?|
|Income from immovable property||Taxed in the state where the property is situated.|
|Profits from Business||Taxed in the state where the enterprise carries out its business.|
|Profits from Shipping and Air Transport||Taxed in the state where the enterprise carries out its operations.|
|Dividends||Taxed in the state where the recipient resides.|
|Interest||Taxed in the state where the recipient resides.|
|Royalty and Fees for Technical Services||Taxed in the state where the recipient resides. The rate of tax ranges from 10-15%.|
|Independent Personal Services||Taxed in the state where the recipient resides.|
|Dependent Personal Services||Taxed in the state where the recipient resides.|
|Directors’ Fees||Taxed in the state where the company (paying the directors’ fees) resides.|
|Income of Artistes and Sportsperson||Taxed in the state where activities are performed.|
|Pension and Annuity||Taxed in the state where the recipient resides.|
|Government Payments||Taxed in the state where the government functions are carried out. If a resident of the other state not being a citizen or national of the first state carries out employment, the remuneration is taxed in the other state.|
|Payment to Students and Trainees||Taxed in the state where they reside. Exempt from tax in the other contracting state.|
|Payments to visiting teachers and researchers||Taxed in the state where they reside. Exempt from tax in the other contracting state.|
Certain circumstances may arise where the income is taxable both in the state where the income arises as well as the recipient’s state of residence. In certain cases, exemptions are applicable for such unique situations.
A full copy of the Singapore-India Double Tax Treaty Agreement can be found here.