International Taxation

In an earlier article, the authors had analysed some of the issues in respect of exchange rates used while computing capital gains in respect of the transfer of shares in a cross-border transaction. While the said article focused on the domestic tax law provisions, there are some interesting issues that arise even in application of tax treaties, especially some specific treaties, due to the language of the said treaties. In this article, the authors seek to analyse an issue in the taxability of capital gains on transfer of shares under India’s DTAAs with Mauritius and Singapore, which relates to the grandfathering provisions.

BACKGROUND

Before the amendment to the tax treaties in 2017, transfer of shares of an Indian company by a resident of Mauritius and Singapore was exempt from tax in India under the respective tax treaties. Both DTAAs have since been amended, which allow the source country (in the above case, being India) the right to tax the income, with investments made before 1 April 2017 being grandfathered. The exemption provided in the Mauritius DTAA (before the amendment) has been subject to significant litigation before the Tribunals and the Courts, with the matter even being examined by the Hon’ble Supreme Court. The Singapore DTAA (before the amendment), while providing the exemption, also had the Limitation of Benefit (‘LOB’) clause