Setting at rest the confusion that had been created over the taxability of investment through countries such as Mauritius and Cyprus, Finance Minister P. Chidambaram, on Tuesday, asserted that the tax residency certificates (TRCs) issued by a foreign government would be accepted as proof of residency for the purposes of availing of benefits under tax treaties.
Speaking to reporters after passage of the Finance Bill in the Lok Sabha, Mr. Chidambaram said: “It is quite clear that tax residency certificates will be accepted. But additional information can also be asked by the government, but the TRC issued by a foreign government will be accepted as a certificate of residence.”
Apprehensions had arisen following the provision in the Finance Bill, 2012, which was interpreted that the TRC alone would render it difficult for foreign investors routing funds through low-tax countries such as Mauritius, Cyprus and Singapore to avail of tax benefits under the Double Taxation Avoidance Agreements (DTAA).
In his presentation of the Budget for 2013-14, the Finance Bill, 2013, had proposed to “amend Sections 90 and 90A 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.”
An interpretation of this provision was seen as conveying that a person holding TRC will also have to be the beneficial owner to claim benefits under the DTAA simply because the “TRC is necessary, but not sufficient condition for availing benefits” under the DTAAs that India has signed with various countries.
Clearing the air, the Finance Bill, approved in the Lok Sabha, was suitably amended to enable withdrawal of the proposed amendment relating to TRC. A new sub-section was introduced to provide that the non-resident assessee shall be required to furnish such other info or document as may be prescribed in the TRC.
It may be recalled that the government had earlier also clarified that with respect to investments from Mauritius, Circular 789 would continue to be in force, pending ongoing discussions between India and Mauritius on revising the DTAA.
The Finance Bill passed by the Lok Sabha also included a relevant amendment to the effect that the government will reduce the tax on interest payments to foreigners on government and corporate debt to five per cent from up to 20 per cent for two years. Mr. Chidambaram pointed out that the requirement of PAN and higher withholding tax of 20 per cent would not apply to interest paid to non-residents in respect of investments in long-term infrastructure bonds.
“These amendments will attract more investments in long-term infrastructure which is a very important need of the country,” he said.
