New Delhi, March 23, 2017

Source based capital gains taxation regime to kick in from April 1

India on Thursday notified the Third Protocol amending the existing India-Singapore double taxation avoidance agreement (DTAA).

With this move, the provisions of the Third Protocol -- signed in December 2016 -- has become law in India.

The India-Singapore DTAA at present provides for residence based taxation of capital gains of shares in a company. The Third Protocol amends this DTAA with effect from April 1,2017 to provide for source based taxation of capital gains arising on sale of shares in a company.

It may be recalled that the Third Protocol had come into force on February 27 and Singapore had on March 1 made an announcement in this regard.

The Central Board of Direct Taxes (CBDT) on Monday said in a statement that the change to source based taxation on capital gains arising on sale of shares in a company would curb revenue loss, prevent double non-taxation and streamline the flow of investments.

Singapore was the largest foreign direct investor into India for the period April 2015 to March 2016, and one of the biggest portfolio investors in Indian markets.

The Third Protocol preserves the existing tax exemption on capital gains for shares acquired before April 1,2017, while providing a transitional arrangement for shares acquired on or after April 1,2017.

In order to provide certainty to investors, investments in shares made before April 1, 2017 have been grandfathered subject to fulfilment of limitation of benefits clause.

 The Third Protocol also inserts Article 9(2) in the DTAA which would facilitate "relieving of economic double taxation in transfer pricing cases".

This is a taxpayer friendly measure and is in line with CBDT's commitments under the Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases, the CBDT has said.

[The Hindu Business Line]