Govt will address tax residency certificate issues

Tax residency norms seen as too tough

If last year, it was the General Anti Avoidance Rules (GAAR) that created confusion post-Budget, spooking the market and denting investor sentiment, this year, it was foreign investment through the most preferred Mauritius route that led Finance Minister P Chidambaram to issue clarification a day after the budget.

 The Finance Ministry issued a statement saying the government is ready to look into concerns expressed by a clause of Tax Residency Certificate (TRC) in the Finance Bill which deals with the tax residency certificate of such investors and address it suitably when the Budget is taken up for discussion in Parliament.

Investors said that the requirements of TRC would make it difficult for them to route their funds from low-tax countries like Mauritius, Cyprus and Singapore to avail the benefits of Double Taxation Avoidance Agreement (DTAA).

But during the course of his post-Budget interaction with some private TV channels, Chidambaram said that Mauritius should not be the preferred route of investment as there are over a 100 countries which invest in India. He also expressed concern about the misuse of the tax treaty by investors through Mauritius route.

His statement that Mauritius should not be treated as the preferred destination, is also expected to dent India’s foreign capital flows, as approximately 42 per cent of FDI and about 40 per cent of FII inflows into India are routed through Mauritius.

Analysts said that given the fact that this was UPA's last full budget before general elections of 2014, expectations were high that the finance minister would focus on  wooing foreign investors and attract more inflows.

He had himself referred to the importance that India attaches to foreign flows at a time when the current account deficit has come to a historical high of 5.4 per cent.

In his Budget speech on Thursday, Chidambaram had said that the Current Account Deficit (CAD) was his government’s greatest worry and that there were only three ways to finance CAD, two of them being FDI and FII.

He had also made a remark that India, at this juncture, did not have any other choice but to welcome foreign investment.