India In Doubt Over Singapore DTAA

by Lorys Charalambous, for LawAndTax-News.com, Cyprus

14 April 2006

India has responded positively to Singapore's request to broaden the scope of the CECA [Comprehensive Economic Cooperation Agreement] the two countries signed last year.

Indian Commerce Minister Kamal Nath said that discussions would cover the inclusion of more tariff lines for trade in goods and some changes to the existing provisions. "We must put some more mass in this agreement," he said.

It is not however clear whether India will agree to Singapore's request to improve the tax framework for Singapore-originating FDI into India. Singapore's Trade and Industry Minister Lim Hng Kiang said that it was a very high priority for both countries to ensure a flow of investments through Singapore to India.

Kamal Nath said however that "a mindset change has to take place."

Singapore and Mauritius are vying to be the dominant conduit country for Indian FDI, and Singapore is asking India to improve the terms of its DTAA during the current review of the CECA, which falls short of the Indian/Mauritian framework for FDI.

The Singaporean government has received representations from several financial services companies, which have said that the definition of a shell company as laid out in the Indian DTAA is proving to be restrictive. Some of these companies have special purpose vehicles (SPVs) which are not covered by the twin conditions for getting capital gains tax exemption in the DTAA, which lays down two eligibility conditions for capital gains tax exemption: listing on a recognised stock exchange and minimum annual operating expenditures in their residence state.

A Singapore official was quoted as saying last month that the government wants to make the DTAA with India "more ambitious".

However, the tax authorities in India have been trying for years to get their courts and government to limit the scope of the Mauritian DTAA, and are likely to be very unhappy about adding further loopholes, as they would see it, for Indian investors to 'round-trip' their profits back into India as FDI.

Some Singapore entities are investing in India through the Mauritius route for tax reasons, say the Singaporeans. Mr Kamal Nath said that New Delhi was examining how Singapore investors could have greater comfort about their Indian investments.

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