Economic Times, New Delhi, 15 August 2005
Saudi, Kuwait want India to give ‘S’pore treatment’
PUNE: India’s decision to grant tax sops to Singapore-based FIIs [foreign institutional investors] under the comprehensive economic cooperation agreement (CECA) has prompted oil-rich Saudi Arabia and Kuwait to pitch for similar concessions in the double taxation avoidance treaties that are being negotiated with Indian tax authorities. Tax reliefs would boost trade and investment flows, they reckon.
Singapore’s FIIs are now exempt from paying capital gains tax on income from sale of shares and certain other assets in India. Singapore does not tax capital gains. So, a resident of Singapore investing in stocks on the Indian bourses is exempt from paying capital gains tax here.
Simply put, India has agreed to “residence-based taxation of capital gains” in the protocol with Singapore. Here, the right to tax rests with the country of residence and not the source country where the income emanates.
Singapore pushed for residence-based taxation of capital gains, citing the Indo-Mauritius tax treaty. Mauritius-based FIIs have, for years, reaped the benefit of capital gains tax exemption on income from sale of shares in India. Mauritius too does not tax capital gains. But much of the advantage of routing investments through Mauritius has been taken away, with the abolition of long-term capital gains on listed securities even for Indian investors.
India is Singapore’s 14th largest trading partner. Trade between India and Singapore tripled over the last decade to touch $12bn in ‘04. Bilateral trade grew by around 50% last year. Mauritius and Singapore are among the choicest destinations for FII inflows into India. India has made clear to Singapore that the tax exemption benefit will be coterminous with the Mauritius tax treaty. This means Singapore’s FIIs will cease to enjoy this benefit if, at any given time, India and Mauritius re-negotiate their tax treaty.
Indian revenue authorities are not keen on relenting to Saudi Arabia’s demand for residence-based taxation of capital gains. More so, when India is nudging Mauritius to agree to a renegotiation of the existing treaty.
Kuwait has gone a step ahead, asking for scrapping of withholding tax on dividends in the proposed DTAA. Right now, dividends are not taxed in the hands of shareholders. But Kuwait, it appears, does not want to take a chance.
DTAAs are essentially bilateral agreements to promote trade and investment by avoiding double taxation of income on non-residents and companies. India has a model DTAA for new treaties it is negotiating or re-negotiating. It incorporates the “limitation of benefit clause” to discourage treaty shopping by a resident of a third country.