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Asian Tax Review: Tax Code Amendments in Singapore and India

By Laurence E. Lipsher - Email Editor

Date : September 29, 2009

Dear Valued Reader,

I’ve been traveling a lot recently — first to KualaLumpur, then to Singapore and Jakarta. I spoke ineach of those locations about investment in China duringa depression. I do not believe the worldwide reportsthat we are coming out of a recession. I think weare in a depression and have yet to feel the full impactof the problems that politicians dare not speak aboutfor fear of losing their bids for reelection.But since I’ve thoroughly covered the P.R.C. lately,I’ll focus this update on Singapore and India, whichhave many tax changes planned.

Singapore

The Singapore government has decided not toimplement capital gains taxation for real estate transactions.The government sought public input aboutwhether it wanted a capital gains tax on the sale ofreal estate, according to an August 22 Straits Times (Singapore)article. Of a population of 4 million, only 64people responded, and of those responders, 60 opposedthe tax.

Sixty-four responses from a base of 4 million? Thatalone raises the question of the validity of submittingthis proposal for public response. But come on, howmany people, regardless the size of the populationbase, are ever going to voluntarily agree to highertaxes? Respondents stated that there are factors otherthan frequency of sales that should be brought into the picture for taxation on gains from sales of property.Interestingly, those other factors were not mentioned inthe article.

Singapore has no capital gains tax, yet its InlandRevenue Authority annually assesses a small number ofindividuals who trade in real estate.

The Straits Times, in an article the following week,categorized the seven types of real estate investors inthe market:

Speculators. I never encountered real estate speculatorsof homes and apartments until I got toHong Kong. I was born into a culture in whichpeople purchase a home to live in, not to trade asa commodity, like stocks. Well, my friends, welcometo this side of the Pacific, where seeminglymore people play the real estate market than lookat a home as something other than a tradablecommodity.

• Specu-vestors. This is a recently coined word that Ithink will eventually make the Oxford English Dictionary.These are speculators who purchase realestate with the intent to quickly trade it but whocan afford to hold on to their investment for awhile if they have to. A good example of this isthe investor who purchases storefront commercialreal estate in Hong Kong — the one who quadruplesthe rent of a commercial tenant, forces thattenant to vacate on lease expiration, and then sitson the vacant property for a year or more, until anew tenant, willing to pay that new, exorbitant rent, comes along. That specu-vestor then sells theproperty to someone else, based on the higher incomevalue of the property. I have a restaurantclient in Hong Kong who, in the 13 years of runningthat particular restaurant, has had five specuvestorlandlords.

Investors. Must I explain this one? This term hasuniversal meaning.

• Investor-occupiers. Ditto.

• Owner-occupiers. Ditto. Ditto.

• Foreign buyers. Ever wonder not only why real estateprices are still high in Singapore during aneconomic crash but also why the skyline is full ofconstruction cranes? It’s because of the moneycoming out of both China and Indonesia to purchasereal estate as a hedge against virtually anythingelse. You don’t seriously believe the governmentis going to put a stop to this when foreignbuyers keep the construction industry and jobsmoving along. Of course, this is what causes realestate bubbles. But hey, who cares when everythingelse has gone to hell in a hand basket. Simplysit back and enjoy that real estate constructionroller coaster ride!

• Property agents. There are about 30,000 real estateagents in Singapore. Although they service all thebuyers mentioned above, too many of them simplycannot resist playing the game themselves andspeculate with reckless abandon.

What do I think will happen? Singapore will have toimpose limits via a capital gains tax on real estate beforelong, for two reasons: First, that bubble is going toburst soon unless some tax limitations are imposed.Second, because China adopts and enforces its ownversion of worldwide tax on its citizenry (using theU.S. IRS as a role model), unless Singapore imposesthe tax, China will get it all. I would not be surprisedif both Singapore and China eventually share informationabout investors of both jurisdictions under theChina-Singapore tax treaty.

Tax Changes

After the Singapore Ministry of Finance announcedits annual budgetary amendments to the Income TaxAct, the government opened up a consultation periodto test the waters of public opinion. However, the publicwas as opinionated as it was regarding commentsearlier in this article — that is, if it was concerned, itwas not about to express any dissatisfaction to the government,given the history. Here is a summary of thechanges that have been or will be implemented thisyear:

• The corporation income tax rate will be reducedfrom 18 percent to 17 percent starting with the2010 year of assessment.

Accelerated depreciation (capital allowances) forplant and machinery will be in effect for both the2010 and 2011 years of assessment.

• Loss carryback rules for the 2009 and 2010 yearsof assessment will be liberalized.

• A tax exemption has been established for allforeign-source income that is remitted into Singaporefrom January 22, 2009, through January21, 2010.

• Corporate mergers and acquisition laws afterJanuary 22, 2009, have been liberalized.

• Incentives for fund management in Singaporefrom April 1, 2009, through March 31, 2014, arenow in effect. Of particular interest is the family ownedinvestment holding company (FIHC).

While the FIHC regulations went into effect inApril 2008, they have been liberalized under the2009 budget. The FIHC enables the holding companyto use subholding companies in other nontaxedjurisdictions (that is, in neighboring Labuan)without any adverse consequences in Singapore.Malaysia has more double taxation avoidanceagreements than Singapore, which has several. Afavorable tax treaty network for lowering overseaswithholding tax and capital gains tax is alwaysworthwhile for consideration if we (or, morelikely, our clients) are in a position to avail ourselvesof this.

India

The All India Federation of Tax Practitioners annualmeeting was held August 29 and 30 in Jamshedpur.The primary topics of discussion were the generalservice tax (GST) and the revisions to the direct taxcode. I’ve previously written about the GST, especiallysince it played an important part of the budget presentedin July. (For prior coverage, see Tax Notes Int’l,Aug. 10, 2009, p. 465, Doc 2009-16745, or 2009 WTD151-16.)

It is the substantial revision of the tax code, announcedthe second week of August, that I have notyet commented on. Unlike the GST, for which the governmenthas promised April 2010 implementation, thetax code changes are to be implemented by April 2011.This is a more realistic date — except that India hasnever, to my knowledge, promulgated anything tax relatedby its promised date.

Minister of Finance Pranab Mukherjee promisedthat by lowering corporate and personal income taxrates, simplifying rules, and eliminating exemptionsthat have been blamed for eroding the tax base, therewould be greater compliance with tax laws. The governmentintends to scrap current rules that permit employeesto choose housing and transportation allowancesas nontaxable income. But I don’t think middle-incometaxpayers — the primary beneficiaries of thesechoices — are going to willingly give up these perks. In fact, I’d bet that 20 months from now, when the newtax rules are supposed to go into effect, surrenderingthese nontaxable options will be part of the tax reformequation. India has struggled for decades to increase itstax base and its low tax-to-GDP ratio, which was alegacy from the initial socialist tax policies of thecountry.

A. Prasanna, director of research at ICICI Securities,doesn’t believe the code changes would have muchimpact because those most successful at avoiding taxesare earning an income that is not based on salaryalone. Perhaps it may be tax evasion, but we’ll nevercall it that — after all, that’s illegal! In an August 13Financial Times article, Prasanna said:

If you look at the salaried class, they pay theirtaxes because they can’t get away. It’s the nonsalariedclass that specializes in tax evasion and Idon’t know how you can completely eliminatethat. There has to be an element of coercion.

There was much media coverage on the Indian taxcode, but my favorite was an August 13 Business Standardarticle, ‘‘Tax Code in 2 Minutes.’’ I read it threetimes, timing myself twice for reading speed. Now, Iopenly admit that I am a slow reader, but the fact remains:I could not finish this article in less than fiveminutes. So here’s my attempt at a two-minute (okay,maybe three-minute) summary of the proposed taxcode. You don’t believe me? Then time yourself to seehow long it takes you to read the following.

Individual Income Taxes

While personal income tax brackets would notchange and the maximum tax rate would stay at 30percent, income thresholds would be increased, withfewer taxpayers in higher brackets.

Home loan interest for owner-occupied propertycould not be used as a deduction for any rental incomegenerated from the property. This is really going to bedifficult to enforce.

Perks included as salary would now be subject totaxation. So says Mukherjee . . . but what does theelectorate say?

Retirement benefits would be exempted from taxonly if they were saved in a retirement benefits account.

Effective April 2011, all withdrawals from providentfund and life insurance accounts would be taxable. Butwhat happens between now and April 2011? Are allprovident funds withdrawn tax free between now andthen going to be placed in a tax-exempt retirement benefitsaccount? And what is a provident fund account ifnot a retirement benefits account?

Corporate Tax

The corporate tax rate would be reduced from 30percent to 25 percent, which is good, but corporateownership in India has meant a license to steal, withunderreporting the norm rather than the exception. Sounless the tax base is increased, there will be fewertaxes collected.

Capital gains transactions for purchases of itemssubject to CGT before April 1, 2000, now would be taxexempt, making some older outsourcing companyshareholders very happy. Yet there is a fly in the proposedCGT ointment: There would no longer be a distinctionbetween short-term and long-term gains.

Tax breaks for sectors such as IT supposedly wouldbe eliminated, but I wouldn’t bet on it.

Area-based exemptions would be grandfathered.Would that include the special economic zones thathave been promoted by the Ministry of Commerce butfiercely opposed by the Ministry of Finance?

Business losses could be carried forward indefinitely.

Dividend distribution tax would be set at 15 percent.

Foreign-based companies in India would be treatedas being Indian resident if control and managementtakes place in India at any time during the year. Thismeans many Mauritius-based companies will have toconform more closely to Mauritius residency rules.There are simply too many well-placed people owningMauritius offshores who would try to prevent changesto the status quo.

Other Proposed Changes

The government would publish a list of willful taxdefaulters, but somehow I think in India it would beconsidered an honor to be on this list.

Those underreporting would be liable to penalties ofup to twice the tax payable, but who would enforcethis? Bribery — a big part of the tax and legal systemin India — would make this meaningless.

If there’s a conflict between the provisions of adouble taxation avoidance agreement and the tax code,the later enactment would prevail. I doubt this wouldmake it through the Lok Sabha.

India’s deficit this year is supposed to be around 7percent, without printing money to bail out banks. Reformingthe tax system, while important, would nottake precedence over jobs creation, though.

It is doubtful that a major tax law change will comeinto effect 20 months from now. But if it does, you canbet there will be sections of the proposal announcedhere that simply will not make it into law.

Until next time,

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