Tuesday, 25 December 2012

Tax residency certificate mandatory for foreign investors

As per a Government of India notification dated 17th September 2012, all foreign investors will have to produce tax residency certificates (TRC) of their base nation to claim benefits under the double taxation avoidance treaty from April 1, 2013.
The amendments to the Income Tax Act, 1961will take effect from April 1, 2013 and will apply in relation to the assessment year 2013-14 and subsequent years.
The notification amends Section 90 and Section 90A of the Act dealing with taxation of foreign investment and tax benefits under the Double Taxation Avoidance Agreements (DTAAs).
Currently, India has a total of 84 DTAAs with foreign countries.
The TRC for availing tax benefits was proposed in the 2012-13 Budget, presented by the then Finance Minister Pranab Mukherjee.The TRC to be obtained by an assessee, not being a resident in India, from the Government of the country or the specified territory, shall contain the name of the assessee, status as to whether it is an individual or company, its nationality and country wherein it is registered or incorporated.

Besides, the TRC should also have the tax identification number of the assessee, its residential status for the purposes of tax, period for which the TRC is applicable and address of the assessee during that period.This requirement also has implications for NRIs who have India filing requirements. They will also be required to produce a tax residency certificate to claim benefits under DTAA in India.
Under a clause in the Double Taxation Avoidance Agreement (DTAA) entered into between two countries, the assessee can take the advantage of paying capital gains tax in either of the two nations.

The scheme of interplay of treaty and domestic legislation ensures that a taxpayer, who is resident of one of the contracting country to the treaty, is entitled to claim applicability of beneficial provisions either of treaty or of the domestic law.
A Memorandum to the 2012-13 budget mentioned that in many instances the taxpayers who are not tax resident of a contracting country do claim benefit under the DTAA entered into by the Government with that country. Thereby, even third party residents claim unintended treaty benefits. 

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