India Signs CECA With Singapore

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

05 July 2005

Despite last-minute disagreements over information-sharing provisions, the India-Singapore Closer Economic Cooperation Agreement (CECA) was signed on 29 June 2005, during Singaporean Prime Minister Lee Hsien Loong’s state visit to India.

Negotiations for the CECA were launched on 27 May 2003 in New Delhi and there have been 13 negotiating rounds. The CECA encompasses trade in goods, trade in services, investment protections and other features. Mutual Recognition Agreements will eliminate duplicative testing and certification of products in specific sectors, and co-operation chapters will encourage and facilitate bilateral cooperation in several sectors. The CECA process has also encompassed a review of the existing Avoidance of Double Taxation Agreement between India and Singapore.

The current DTAA, which was signed in January 1994, has been improved through a provision that tax residents will enjoy capital gains tax exemption on investments in India, bringing the Treaty into line with the India-Mauritius treaty. However, a tax resident will not be entitled to the capital gains exemption if its affairs are arranged primarily to take advantage of the benefits of the DTA. In addition, a shell/conduit company with negligible or nil business operations or with no real and continuous business activities in Singapore is disallowed from enjoying the capital gains exemption. This wording echoes the changes that Indian tax authorities have been trying (with limited success) to impose on the Mauritius treaty.

For the purposes of the capital gains tax exemption, a company is not a shell company if:

• It is listed on recognised stock exchanges of the Contracting State; or
• Its total annual expenditure on operations in the residence State is equal to or more than S$200,000 or Indian Rs 50,00,000 in the respective Contracting State as the case may be, in the immediately preceding period of 24 months from the date the gains arise.

The Trade in Goods Chapter provides for tariff concessions that will make Singapore goods more competitive vis-à-vis other foreign imports into India. Tariffs on approximately 75% of Singapore's domestic exports will be eliminated or substantially reduced within 5 years. The sectors benefiting includes electrical and electronics, instrumentation, pharmaceuticals, and plastics.

The services chapter ensures that service suppliers in India and Singapore are guaranteed access into each other’s markets:

• Both countries may not restrict access into their services market by imposing quantitative restrictions (eg. numerical quotas on services suppliers that are allowed in the market);
• Services suppliers will be granted the same treatment as local service suppliers, i.e., no discrimination;
• The chapter ensures that domestic regulations governing the provision of services are reasonable, impartial and objective.

Singapore-owned or controlled fund managers will be able to offer Indian investors mutual funds and collective investment schemes (CIS) listed on the Singapore Exchange (SGX) as well as exchange traded funds (ETF). These instruments are free from the restriction that they must only invest in entities which have a stake in Indian companies. India has similarly lifted this limitation for Indian-owned or controlled fund managers.

Indian banks and financial institutions can take advantage of CECA to expand their activities in Singapore. To this end, Indian banks, that satisfy Singapore’s admission criteria, will be given Wholesale Bank licences and up to 3 bank licences with Qualifying Full Banks privileges. In addition, India insurers and capital market intermediaries that satisfy our admission criteria will have open access to set up in Singapore.

India recently signed a similar Comprehensive Economic Cooperation Partnership Agreement with Mauritius which liberalises trade in goods and services and facilitates joint ventures, and also encompasses the existing double taxation avoidance agreement between the two countries, seemingly fire-proofing it against further attacks from India's CBDT. Apparently, Singapore and Mauritius are now more or less on all fours as conduit territories for Indian FDI; it will be interesting to see how investors interpret the new situation.

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