Saturday, March 2, 2013

Concerns over tax residency certificate allayed

NEW DELHI, March 2, 2013

In a fire-fighting mode yet again, just a day after the Budget, as stock markets spooked on February 28 itself and continued to drift in view of FII (foreign institutional investor) concerns, the Finance Ministry, on Friday, sought to reassure investors that the uncertainty regarding the Tax Residency Certificate (TRC) for claiming treaty benefits will be 'suitably' addressed during discussions on the Finance Bill in Parliament.

"…Since a concern has been expressed about the language of sub-Section (5) of Section 90 (of I-T Act), this concern will be addressed suitably when the Finance Bill is taken up for consideration," the Ministry said in a statement.

Seeking to explain the reason for ambiguous interpretation of the relevant provisions, the Ministry statement said that concern has been expressed regarding the Clause in the Finance Bill that amends Section 90 of the Income Tax Act that deals with double taxation avoidance agreements (DTAAs). While sub-Section (4) of Section 90 was introduced last year by the Finance Act, 2012, that sub-Section requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under the DTAA. DTAAs, it said, recognise different kinds of income and stipulate that a resident of a contracting state will be entitled to the benefits of the treaty.

Necessary but not sufficient

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 of 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 statement said. In fact, this aspect was also reiterated by Finance Minister P. Chidambaram during his post-Budget press conference on Thursday. The Ministry statement noted that it has been brought to notice that the language of the proposed sub-Section (5) of Section 90 could mean that the TRC produced by a resident of a contracting state could be questioned by the income tax authorities in India.

In its bid to allay concerns in this regard, the statement said: "The government wishes to make it clear that that is not the intention of the proposed sub-Section (5) of Section 90. The Tax Residency Certificate produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state and the income tax authorities in India will not go behind the TRC and question his resident status."

However, in the case of Mauritius, Circular No. 789 dated April 13, 2000, continues to be in force, pending ongoing discussions between India and Mauritius, it said.
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