An Essential Guide to India-Singapore DTA: Introduction and Conditions
India-Singapore DTA is the double tax agreement between the two countries which avoids double taxation on income. For any income that is liable to be taxed on India and Singapore, they will only be taxed on one jurisdiction, which decreases the taxpayer’s burden
The first DTA between these two countries came into effect in 1994. Since then, the provisions have been changed three times, once in 2005, once in 2011, and another recently in 2016 (came into effect in 2017). Furthermore, with both of these countries introducing various tax schemes, the pressure on taxpayers has dramatically decreased in recent times.
What Type of Income Does the India-Singapore DTA Cover?
The double tax agreement between any two countries may cover income, property, and other taxes. In the case of Singapore and India, the double tax agreement is applicable for Income-tax (including surcharge in India) and the Capital Gains tax. The income tax is applicable to both individuals and corporations.
What Are the Provisions of India-Singapore DTA?
The key provisions indicate where a person or a company should pay their taxes depending on the nature of their income. These are the conditions:
A company needs to pay money on the jurisdiction where they operate. For example, say that an Indian company has a branch in Singapore. Then, with the DTA, they will only need to pay their tax in Singapore. The same goes for a Singaporean company with an office in India- for that particular office, they need to pay tax only in India.
Remember, the tax rates in some cases can differ in jurisdictions because of the DTA. For instance, in Singapore, non-residents generally have to pay a 15% withholding tax for interest. In India, it could be between 5% to 20% plus surcharge and cess. However, you have to pay lower amounts with the India-Singapore DTA:
- The tax rate is 10% of the gross amount if you pay interest on the loan granted by a bank or a financial institution.
- You have to pay a tax rate of 15% of the gross amount on other cases.
The tax rate for Royalty can be between 10% to 15% depending on the type of royalty the non-residents receive from the respective jurisdiction.
Before 1 April 2020, India had a Dividend Distribution Tax (DDT) of 15% plus surcharge and cess, which had to be paid by the company while distributing dividends to its shareholders. The shareholders didn’t have to pay tax.
However, since 1 April 2020, the shareholders have to pay a Dividend Withholding tax of 10% for Indian residents, and 20% for foreign investors. On the other hand, Singapore has no tax on dividends.
This is the provision for Dividends according to the Double Tax Agreement:
The recipient has to pay 10% if they hold 25% shares of the company paying a dividend.
In any other case, the recipient needs to pay 15%.
Capital Gains Tax
Capital Gains tax is another area where taxpayers in Singapore benefit, as there is no capital gains tax in the city-state. You see, capital gains while selling a property or a share is taxable only in the country where the taxpayer resides. This basically means even if a person residing in Singapore sells property in India, they don’t need.
Limitation of Benefits
You see, with there not being capital gain taxes in Singapore, some third-country residents may illegitimately try to open a withholding company in Singapore just to avoid capital gains tax in India. To avoid such cases, there is a rule known as the Limitations of Benefits (LOB).
As per the LOB, companies established just to take capital gains tax benefits won’t be able to avail of the treaty. Furthermore, shell companies (companies with negligible business operations in India or Singapore) preceding 24 months of the time when the capital gains arose can’t take benefit of the DTA for capital gains tax.
Here are the conditions for a firm to be a shell company:
If the firm is in Singapore, its annual expenditure is lower than S$200,000 in the last 24 months.
For an India company, if the expenditure is less than Rs.50,00,000.
Note: for the shares acquired between April 1, 2017, to March 31, 2019, the LOB conditions should be fulfilled preceding 12 months from the date when the capital gains arise. For now, we don’t have any information regarding what happens for shares acquired after March 31, 2019, but a protocol will be introduced sooner or later.
Capital Gains Tax on the Sale of Shares
These are the rules for the capital gains tax for the share of shares:
- The capital gains tax for the shares of a company acquired before April 1, 2017, should be paid in the country where the investor resides.
- For the shares acquired between April 1, 2017, to March 31, 2019, the capital gains tax will be taxed in the country where the company is tax resident. The rate is 50% of the general capital gains tax rate.
- If you sell a share acquired after April 1, 2019, you will have to pay a capital gains tax with the rate being the general capital tax rate (100% of the general capital gains tax).
India-Singapore DTA: What if Confusions Arise?
In article 9(2) of the third protocol of the India-Singapore double tax agreement, it has been mentioned that any transfer pricing dispute between these two countries may be resolved in two ways. It could either be through a Mutual agreement Procedure or through Bilateral Advance Pricing Agreements (APAs).
India-Singapore DTA: Frequently Asked Questions
Here are some other tax inquiries we have had:
Where Do You Need to Pay the Taxes for Director’s Fees?
You have to pay the director’s fees in the country where you have registered the company.
Where Do Artists and Sportspeople Need to Pay their Taxes?
Artists and sportspersons are taxed on the country they make a particular income.
Note: For independent and dependent personal services, the recipient needs to pay taxes in the place they reside. The same goes for pension and annuity.
The taxes for payment to students and trainees are to be paid in the country where they reside, similar to the payments for visiting teachers and researchers.
The India-Singapore DTA helps people and companies avoid double taxation in these two countries. Furthermore, it has been promoting trade between these two jurisdictions, which is great news for people wanting to open a company in Singapore, or in India.
To make full use of the India-Singapore DTA, you may need some help from professionals to understand all the terms and see how you can apply them in your business. For that, you can take 3E Accounting’s Withholding tax services; we will help ensure you and your company pay minimum taxes while doing business in these two jurisdictions.