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Case for Opinion: Taxation of Equity Investment in Singapore

Facts of the case:

Mr.Sharad Dalmia, an Indian Resident along with his wife Mrs.Dalmia (hereinafter referred as ‘the assesses’), are
an Indian Resident for F.Y. 2019-20 (relevant to A.Y. 2020-21) looking for an investment opportunity in Singapore to
the tune of 2, 50,000 US$ under the Liberalization Remittance Scheme of Foreign Exchange Management Act,
1999 (FEMA) after fulfilling all the procedural requirements of FEMA through a joint account in financial year 2019-
20. Mr.Dalmia is keen to invest the aforesaid amount primarily in Equity Instruments. The opinion is sought for
taxation aspect of the proposed transaction in Indian Tax Regime.

Opinion:

With reference to the above scenario our opinion is as follows

1. As per section 6 (1) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’), assesses are resident
and ordinary resident of India for the year under consideration, accordingly all the relevant provisions of the
Act and DTAA applicable to resident and ordinary residents shall be applicable to them.
2. According to the facts of the case, the assesses are looking to invest into equity instruments in Singapore
through which income could potentially be derived in the form of Capital Gains (Long Term/Short Term),
Dividend, etc.
3. Assesses being a resident and ordinary resident of India, income earned across globe will be subject to tax
in India as per section 5 of the Act. However, in order to counter double taxation reliance has to be placed
upon section 90 (Bilateral Double Taxation Avoidance Agreement) and 91 (Unilateral Double Taxation
Avoidance Agreement) of the Act.
4. Since, India has entered into a comprehensive bilateral double taxation avoidance agreement with
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Singapore which has come on force from 27 May of 1994 (hereinafter to be referred as ‘India-Singapore
DTAA’), section 90 shall be applicable to the case under opinion.
5. As per section 90 of the Act, ‘Where the Central Government has entered into an agreement with the
Government of any country outside India or specified territory outside India, as the case may be, under sub-
section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to
the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are
more beneficial to that assessee’. In the case of CIT v/s P.V.A.L Kulandungan Chettiar, Hon’ble Supreme
Court held that in case of any conflict between the provisions of the DTAA and the Income tax Act the
provisions of DTAA would prevail over the Act, to the extent they are more beneficial to the assessee. In
consequence to this, it is necessary to place reliance on DTAA entered into with Singapore govt by Central
Govt of India.
Opinion on Taxation of Equity Investment in Singapore

5. Accordingly, Article 10 of India-Singapore DTAA provide for allocation of taxation rights in relation to
dividend income, which states as follows:

a)“Dividends paid by a company which is a resident of a Contracting State to a resident of the other
Contracting State may be taxed in that other State.”

b) However, such dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident and according to the laws of that State, but if the recipient is the
beneficial owner of the dividends, the tax so charged shall not exceed:

 10 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at
least 25 per cent of the shares of the company paying the dividends;
 15 per cent of the gross amount of the dividends in all other cases”

However, Singapore operates on a one-tier corporate tax system, under which corporate tax paid on
company’s profit is final. Dividends paid by Singapore resident companies are tax exempt in the hands of
recipient.

Hence as per Article 10 (1) of the India-Singapore DTAA, assesses have to pay tax as per applicable tax
slab under Indian Tax Laws and no benefit can be availed of section 10 (34) of the Act as dividend is
earned from other than domestic company i.e. a Foreign Company.

Note: The above opinion is based on the view that it invested for investment perspective and not for
carrying of any business as in this case Article 10 is not applicable and Article 7 will be applicable for which
discusses about the Business Profits.

6. Other form of income which can be derived from equity investment is capital gains which arise from transfer
of the equity instruments. As per the relevant extract Article 13 (4B) of India-Singapore DTAA “Gains from
the alienation of shares acquired on or after 1 April 2017 in a company which is a resident of a Contracting
State may be taxed in that State”

However as per Inland Revenue authority of Singapore, no tax is levied on capital gains arising from
transfer of shares unless such transfer is made in the nature of business and not investments.

As per Article 24 of the India-Singapore DTAA, Limitation of benefits clause, ‘where this Agreement
provides (with or without other conditions) that income from sources in a Contracting State shall be exempt
from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other
Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to
or received in that other Contracting State and not by reference to the full amount thereof, then the
exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State
shall apply to so much of the income as is remitted to or received in that other Contracting State’.
Opinion on Taxation of Equity Investment in Singapore
However, Article 24 will not have any implications on the given case as Article 13 provides allocation of
taxing right and not exemption or reduction in the rate of income tax and the resident country (India in the
given case) does not levy any tax on remittance of income from Singapore to India.

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Accordingly, gains arising from transfer of equity shares after 01 April 2017 shall be taxed in Singapore as
per Article 14 (4B) as equity shares belong to company residents of Singapore

Conclusion:

Dividend will be taxed in India under the normal tax slabs and capital gains shall be taxed as per Singapore
tax laws which eventually do not charge any tax on the same. Investment of funds through joint account will
not impact the taxability of transaction as taxability depends upon the ownership of the equity instruments.

Disclaimer: Above opinion is based on the facts provided and to the best of our knowledge. The opinion in no way promotes or
demotes any kind of investment decisions and is purely focuses on tax impacts.