India-Singapore tax treaty: heavy cutback in P-note investments

As a consequence of the Indian government's tax treaty with Singapore and Mauritius, the capital inflow in India through participatory notes is likely to take a huge plunge.

The treaty expected to come into effect from April 1, 2017, will disrupt a large amount of foreign institutional investment made through P-notes by the investors who are not registered with the Securities Exchange Board of India (SEBI), as 90 per cent of P-note investments flow from Singapore and Mauritius.

However, according to the government's reports, P-notes act as the medium to bring the hoarded black money back to the country from abroad. The P-notes allow anonymous investments, providing privacy to the investors.

At present, the sovereign states like Singapore and Mauritius gain short term capital gains from every investment made. However, the treaty will impose a 15 per cent short term capital gains tax on share transfers, while a higher tax rate of 30 per cent will be imposed on future and options. Further, long term capital gains tax of 10 per cent will be imposed on private equity funds.

Thus, the aforesaid pursuit to curb black money will result in heavy cutbacks in FIIs.