Tax implications/ benefits under India & Singapore tax treaty

• Taxation
• ||
• January 22, 2022

The double taxation avoidance agreement came into effect in 1994 between India and Singapore. The provisions of this agreement were rectified by a treaty signed on June 29, 2005. Its second treaty was signed on June 24, 2011, coming into force on September 1, 2011. This agreement abolishes the double taxation of income between India & Singapore and reduces the overall tax burden of the residents of both countries.

In the absence of such an agreement, income is liable to be double-taxed, i.e. both country would levy their tax on the same income. This double taxation harms income flows between the countries and thereby discourages trade and commerce between the countries.

To address this problem, India and Singapore signed the DTA, thereby reducing the overall burden on the taxpayer.

Scope of the agreement
The India-Singapore DTA applies to the residents (legal entities and individuals) of the signing countries, i.e. India and Singapore. 

Kinds of taxes covered
The following kinds of taxes are covered in the DTA agreement:

1. In India

• Income tax, including any surcharge
• Capital gains tax

2. In Singapore

• Income tax
• Capital gains tax

The state where the income is taxed
The DTA explicitly states where the different income types of a resident of either Singapore or India will be subject to tax. This is important since the taxable income country will determine the tax rate applicable.

Tax rates
The DTA states the kind of income that may arise and the tax rate applicable. For instance, in the case of royalty income, the tax rate in the DTA is 10%. This indicates that if a taxpayer lives in Singapore and obtains a royalty from India, the tax rate on the earnings will be 10%. This is crucial since the rates in the DTA agreed by the countries and the corresponding prevailing tax rates of the country can vary.

Fundamental provisions of India and Singapore DTA
The basic provisions of the India-Singapore DTA include:

1. Business profits
   According to the DTA, the gains of an enterprise are taxable only in the state where the business operations are carried out. Therefore, if a Singapore-based business has a constant foundation in India, the gains attributable to the constant foundation will be taxed only in India. If Singapore and India did not have a DTA in force, the business’s gains could be taxed in Singapore and India. The gains generated by the permanent establishment would bear the tax burden twice in such a case.

2. Interest, royalty and dividend
   The DTA states the rates applicable in the case of income from interest, royalties, dividends etc. Normally, the tax rates in the DTA are lower than the prevailing tax rates in the countries that are parties to the agreement.

3. Capital gains
   Article 13 of the DTA defines the state where capital gains are subject to tax. Another important aspect of the India- Singapore DTA is the limitation of the benefits clause initiated in the treaty signed between the countries in 2005.

4. Associated enterprises
   The third protocol to the India-Singapore double tax treaty initiated article 9(2), which specifies that any transfer pricing discourse between India and Singapore will either be solved through a mutual agreement procedure or through bilateral advance pricing agreements. India and Singapore will enter into bilateral discussions to eliminate double taxation emerging from transfer pricing. Once both the countries enter into bilateral APAs, there will be considerable assurance on the transfer pricing method.
   

DTA
The DTA explicitly states where the different income types of a resident of either Singapore or India will be subject to tax. The following table displays the income or payments made and the state where the income is taxed. This is prime since the place of taxation will determine the tax rate applicable to that type of income under the DTA.

Some instances may occur where the income is taxable in both countries, i.e. where the income arises and the recipient’s state of residence. In some cases, exemptions are applicable for such unique situations.

At AJSH, we assist our clients in dealing with various income tax compliances, including income tax assessments, TDS returns, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about the Tax Implications/ Benefits under India & Singapore Tax Treaty, kindly contact us.