How Singapore NRIs can navigate DTAA hurdle on capital gains tax
International tax treaties can be extremely confusing for the layman. That is because the provisions in such treaties are drafted in a very convoluting manner. And it is not just the layman who is confounded.
Even experts in other fields struggle to decipher the implications of certain provisions in such treaties. Harshal Bhuta, a chartered accountant (CA), will vouch for that. Bhuta, a partner at P.R.
Bhuta & Co., came across one such instance when he was advising one of his NRI clients from Singapore on Indian investments. Under the Double Taxation Avoidance Agreement (DTAA), non-resident Indians (NRIs) based in select countries such as Singapore, UAE and Mauritius don’t have to pay capital gains tax on Indian mutual funds (MF). For NRIs based in Singapore, there is a rider though—a prerequisite that they have to meet before they are eligible for the tax benefit.
Article 24 (1) of the India-Singapore DTAA, states that the capital gains needs to be repatriated to Singapore. Since MF capital gains have to be taxed in Singapore (and not in India), the treaty requires the proceeds to be sent there for taxation. And herein begins the confusion.
Singapore does not levy any tax on capital gains. Thus, the DTAA rule that states that gains need to be taxed in Singapore might not be fulfilled and, hence, some financial experts are of the opinion that the gains might be taxable in India. Another interpretation by other experts is that since India does not have taxation rights on capital gains in the first place under the treaty, the income tax department cannot ask NRIs based in Singapore to pay up taxes if such a situation arises.
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