This post is also available in: 简体中文 (Chinese (Simplified))
Company Setup in Singapore to do Business in India
Indian startups are going places today. Singapore is one of the ‘go to place’ for several Indian startups. Take for instance, Flipkart (India’s largest online retailer) and InMobi (India’s largest mobile advertising network) are both registered in Singapore.
Singapore is said to be one of the most politically stable economies in the world. Its high ease of operations is due to its almost negligent rate of corruption. Furthermore, its strategic location makes it the perfect hub to gain access to the South East Asian markets. It is difficult to enter markets like Malaysia, Vietnam, Indonesia and Philippines without a Singapore setup, which helps ease issues like language constraints and cultural habits of people and businesses in these countries.
Encouraged by the Singapore Government’s liberal foreign direct investment policies, business-friendly corporate tax policies, tax exemptions on foreign-sourced incomes and first-world infrastructure, more and more India companies are making Singapore their incorporation destination.
Ease of Doing Business
The World Bank’s yearly Doing Business Report, has ranked Singapore consistently amongst the top in the world for ‘Ease of Doing Business’. Singapore scored high points in areas that are important for entrepreneurs and start-ups; namely access to capital and credit, as well as how effectively insolvencies are resolved.
Better Infrastructure and Lower Corruption
Start-up companies need all the assistance they can get in order to achieve their maximum potential. Even the most experienced entrepreneurs cannot operate in an environment that is hostile towards business growth. The difference between Singapore and India, with regards to fostering new businesses, is apparent. In the latest Global Competitiveness Report released by the World Economic Forum, Singapore is ranked 2nd out of 138 countries, India is at 39th.
Although India has a rapidly growing economy, it still proves to be a difficult place for businesses to operate from. A breakdown of the report shows that the lack of infrastructure and high levels of corruption are two of the biggest stumbling blocks for start-ups in India. As a result, a neighbouring country like Singapore that does so well in these rankings appeals to budding business owners.
Availability of Skilled Workforce
Not having the right team is one of the key reasons why a start-up with a good idea can fail. The level of talent available in the country is directly proportional to how skilled the employees of a start-up company can be. In addition, INSEAD has ranked Singapore 2nd on their Global Talent Competitiveness Index.
Better Access to Emerging Economies
One factor that works in Singapore’s advantage is its location. Any start-up based in Singapore places itself right at the doorstep of multiple emerging economies in South-East Asia, including Indonesia and Thailand. Singapore is very well-linked with the rest of the world thanks to its excellent infrastructure. For many start-ups, expanding to international markets in the early stages is crucial and Singapore provides a much better platform.
As long as the current performance gap between India and Singapore exists, it is very likely that more Indian start-ups continue heading to Singapore to set up businesses.
Selling in strong Singapore Dollar and low cost in India
Having a Singapore set-up presents the opportunity to sell in strong SGD along with low cost in India. The profit margin can be very high especially for IT businesses and software development.
Low Singapore corporate tax rate
Singapore has one of the most attractive corporate tax rates in the world. At 17%, it is only half of India’s corporate tax rate. In addition, Singapore offers tax exemption for newly-formed companies. Although start-ups can be eligible for numerous tax breaks in India, the eventual tax amount they end up paying is still greater than what they would have to pay in Singapore.
This has often been one of the prime factors why businesses choose Singapore as their hub for South and South-East Asia. It is only natural then that even start-ups would want to benefit from this. Singapore has a comprehensive Avoidance of Double Taxation Agreement (DTA) in place with India, which insures that Indian entrepreneurs are not penalised for establishing their start-ups in Singapore.
Tax advantages of incorporating a Singapore Company
Singapore’s double taxation agreement (DTA) with India puts a limit on the level of withholding taxes payable on dividends from overseas holdings. Moreover, the city-state’s low corporate income tax rate (17 percent) and lack of a capital gains tax make it an ideal jurisdiction for basing the holding company operations. Comparatively, the headline corporate tax rate in India is 30% excluding surcharge and education cess.
Understanding the India-Singapore DTA
Taxation on Dividends
Dividends distributed by the Indian subsidiary to the Singapore Holding is not subjected to withholding tax in India. However, India does levy a dividend distribution tax at 16.22%.
If qualifying conditions are met, the dividends received from the Indian Subsidiary can be exempted from tax under Singapore’s foreign-sourced income exemption scheme. This exemption apply only when the headline corporate tax rate in the foreign country from which the income (which is India in this case) is received is at least 15%, and the income had already been subjected to tax in that particular country.
Taxation on Interest Income
According to the DTA, the interest income is taxed at a rate of 15% in the country in which the income arises. A similar tax may be levied in the recipient country as well.
Taxation on Royalties and Fees for Technical Services
Similar provision to the tax on interest income, though the rate is fixed at 10% only.
Avoiding Double Taxation
If India sourced income of a Singapore company is subjected to taxation twice (once in India and then again in Singapore upon remittance), then the Singapore company can claim relief under the Foreign Tax Credit (FTC) scheme, which allows the company to claim a credit for the tax paid in India against the Singapore tax that is payable on the same income. The claim is called Double Tax Relief (DTR).
Moreover, under the Singapore Government’s tax exemption for new start-up companies, newly-incorporated qualifying companies in Singapore are given tax exemptions of up to 100% on normal chargeable income of up to S$300,000 for each of the first three consecutive tax years of its operation.
Other benefits such as the Corporate Tax Rebate scheme (50% on tax payable), no tax on dividends, tax exemption on foreign-sourced income, and the Foreign Tax Credit (FTC) pooling system, are added advantages.
Especially, the FTC Pooling system is noteworthy, which the Singapore Government introduced in 2011. This scheme while simplifying tax compliance has reduce the tax payable on foreign-sourced income for Singapore companies. To qualify for FTC Pooling, the headline corporate tax rate in the foreign country from which the income is received (which in this case is India) must be at least 15% (which it is), and the income must already been subjected to tax in that particular country.
Update of DTA
Singapore and India signed a Protocol to amend their bilateral Avoidance of Double Taxation Agreement (DTA) in New Delhi on 30 December 2016.
The updated DTA preserves the existing tax exemption on capital gains for shares acquired before 1 April 2017, while providing a transitional arrangement for shares acquired on or after 1 April 2017. For shares acquired on or after 1 April 2017, there will be a two year transition period, during which the capital gains from such shares will be taxed at 50% of India’s domestic tax rate if the capital gains arise during 1 April 2017 to 31 March 2019.
Taxation of capital gains
|Shares acquired||Tax treatment for gains arising from the alienation of such shares|
|(a) Before 1 April 2017||· Remain taxable only in the residence State of the alienator
· Subject to specified conditions including expenditure on operations of the alienator in its residence State of at least S$200,000 in Singapore or Indian Rs5,000,000 in India, as the case may be, for each of the 12- month periods in the immediately preceding period of 24 months from the date on which the gains arise
· Status quo prevails
|(b) On or after 1 April 2017||For gains that arise during the period 1 April 2017 to 31 March 2019
· Tax rate imposed on such gains will be limited to 50% of the tax rate applicable on such gains in the State in which the company whose shares are alienated is resident
· Subject to specified conditions including expenditure on operations of the alienator in its residence State of at least S$200,000 in Singapore or Indian Rs5,000,000 in India, as the case may be, for the immediately preceding period of 12 months from the date on which the gains arise
|For gains that arise after 31 March 2019
· Will be taxable in the State in which the company whose shares are alienated is resident
Company A is a Singapore tax resident. It acquires shares in an Indian tax-resident company B. A meets the specified conditions including the expenditure on operations.
Scenario 1: A acquires B’s shares before 1 April 2017
When A disposes these shares eventually, the capital gains will not be subject to capital gains tax in India. This applies irrespective of when the gains arise.
Scenario 2: A acquires B’s shares on or after 1 April 2017
When A disposes these shares during the period 1 April 2017 to 31 March 2019, the capital gains arising during this period will be taxed at 50% of India’s domestic tax rate.
When A disposes these shares on or after 1 April 2019, the capital gains will be taxed at India’s full domestic tax rate.
As such, 1 April 2017 is the cut-off acquisition date to avoid suffering capital gains tax on future disposal of shares in India. For businesses intending to incorporate a Singapore holding company with Indian subsidiaries, the setup should be done before 1 April 2017.