Promise kept on clarity

The finance ministry has soothed concerns over requirements for claiming tax treaty benefits and mandatory submission of tax residency  certificate (TRC). TRC produced by a non-resident/ foreign entity will be accepted as evidence of residential status on such foreign jurisdiction and the income tax authorities will not go behind the TRC to question residential status.

Further, with respect to investors or persons resident of Mauritius, circular no 789  will continue to remain in force, pending ongoing discussions between India and Mauritius.
To this effect, an appropriate amendment will be introduced when the Finance Bill 2013 is taken up for consideration.

In the context of the Double Tax Avoidance Agreement (DTAA) between India and Mauritius, the Central Board of Direct taxes had on April 13, 2000, issued a circular which clarified that a TRC issued by Mauritius Tax authorities would be sufficient evidence for claiming benefits under the India-Mauritius tax treaty.

The validity of the said circular was subsequently challenged before the Supreme Court in the case of Azadi Bachao Andolan and the matter was put to rest with the Hon'ble Court upholding the validity of the circular.

Based on this ruling, DTAA benefits were being availed of by investors being tax resident of Mauritius by submitting the TRC as a sufficient compliance for substantiating tax residency – and as matter of practice was being accepted by the Indian tax authorities. 

Thus effectively, as per provisions of DTAA, capital gains tax on shares was only taxable in Mauritius and not in India.

The ghost of Azadi Bachao litigation was brought back to life in March 2012 with the then finance minister seeking to amend the law by making it mandatory for every non-resident to submit a TRC obtained from the home country tax authorities for availing the tax treaty benefits.

The ambiguity, however, arose on account of the Memorandum to the Finance Bill 2012 which suggested that submission of TRC is a necessary but not a sufficient condition for availing tax treaty benefits.

This created doubts in the minds of the investor who were now unclear on what would be the additional conditions required to avail tax treaty benefits. The finance minister in the Budget 2013 expedition sought to incorporate the language of the Memorandum to Finance Bill 2012 into the domestic tax law.

A literal reading of the proposed amendment seemed to suggest that TRC is not sufficient proof to claim treaty benefits.  This further dented the investor confidence over eligibility to claim tax treaty benefits and intention of the Government to challenge tax treaty benefits post investment by foreign corporate.

In view of the apprehension expressed by the investor community, the finance ministry has now clarified that the proposed amendments does not intend to dilute the legal position as it subsists today and submission of TRC would continue to be accepted as evidence of tax residency.

They have also intended to clarify that it is not their intention to preclude the Indian tax authorities from looking into compliance of other treaty conditions such as beneficial ownership of underlying income (ie royalty, interest, dividend etc).

One would have to wait and watch as to how the finance ministry dispels the concerns of the investor community while ensuring that treaty shopping is not resorted to by the foreign investors.

With due respect to the finance minister, taking this bold step to provide a speedy clarification is indeed commendable and he has lived up to his promise.

We certainly hope that the final changes would respect the true spirit of these clarifications (including that of press meeting).

The authors are with Ernst & Young