Tax Residency Certificate not enough to claim DTAA benefit, says Chidambaram

In what is expected to directly impact foreign investors routing funds through the island tax haven Mauritius, Finance Minister P. Chidambaram on Thursday made it clear that a Tax Residency Certificate (TRC) would not be enough to claim benefits under the DTAAs (Double Taxation Avoidance Agreements).

Announcing amendments in this regard in his budget speech to plug the loophole and prevent tax evasion under the garb of such treaties with various countries, he said: “It is proposed to amend Sections 90 and 90A [of the Income-Tax Act] in order to provide that submission of a tax residency certificate is a necessary but not a sufficient condition for claiming benefits under the agreements referred to in Sections 90 and 90A.”

The relevant Sections pertain to DTAAs that India has entered into with various countries to facilitate availability of relief from double taxation to foreign investors, exchange of information and recovery of taxes.

“All that the Section [90 A (4)] intends to say is, if you produce a TRC that is a complete answer to your status as a resident. But whether you are the beneficial owner is a separate issue. The TRC certifies that you are a resident. It does not certify you are a beneficial owner,” Mr. Chidambaram said.

The amendments will take effect retrospectively from April 1, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years.

Conditions for foreign investors

The Minister explained that the tax treaties contained two conditions of residency and beneficial ownership.

“As far as residency is concerned, we will accept the certificate of residency that he produces from that country. As far as beneficial ownership is concerned, that is a question of fact. We are not doing anything unfriendly to the foreign investor. You [foreign investor] have to satisfy two conditions,” he said.

While about 42 per cent of the FDI (foreign direct investment) and nearly 40 per cent of FII (foreign institutional investor) inflows into the country are routed through Mauritius, it is known that a vast majority of such entities are actually third-country investors, which merely use the Double Taxation Avoidance Convention (DTAC) with Mauritius through the issue of TRCs for saving on capital gains tax.

India has been trying to re-negotiate the DTAC with Mauritius to plug the loopholes and consequent revenue leakages but not much progress has been made.