Government assures foreign investors on tax residency certificate

Just a day after presenting the national budget, the government Friday sought to assure overseas investors that their fear of losing benefits over the Tax Residency Certificate (TRC) will be addressed during discussion on the Finance Bill in parliament.

In the federal budget for 2013-14, Finance Minister P. Chidambaram on Thursday proposed changes in the Finance Act that says a tax residency certificate (TRC) is a “necessary but not sufficient condition” for availing benefits of the double taxation avoidance agreement (DTAA). 

“The certificate of being resident in a specified territory outside India shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein," said an amendment proposed in the Finance Bill.
"Some tax avoidance arrangements have come to notice and I propose to plug the loophole. Some unlisted companies have avoided dividend distribution tax by arrangements involving buyback of shares," Chidambaram had said in his budget speech.

The move caused confusion in the markets leading to huge sell-off by overseas investors, resulting in the sensitive index (Sensex) of the Bombay Stock Exchange (BSE) losing 290 points.

The foreign investors were concerned that the TRC provision would make it difficult for them routing their funds from low-tax havens like Mauritius, Cyprus and Singapore to avail the benefits under the Double Taxation Avoidance Agreement (DTAA).

In Friday's clarification, the CBDT said the changes in the Income Tax Act were introduced last year that require an assessee to produce a tax residence certificate to claim benefits under the DTAA.

“In the explanatory memorandum to the Finance Act, 2012, it was stated that the Tax Residency Certificate containing prescribed particulars is a necessary but not sufficient condition for availing benefits of the DTAA. The same words are proposed to be introduced in the Income-tax Act as sub-section (5) of section 90.  Hence, it will be clear that nothing new has been done this year which was not there already last year,” the CBDT said.

“However, since a concern has been expressed about the language of sub-section (5) of section 90, this concern will be addressed suitably when the Finance Bill is taken up for consideration,” it added.