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The Finance Ministry has assured spooked capital market investors that foreign institutional investors from Mauritius, for the time being, will continue to get all tax benefits as earlier.
In a statement on Friday, the Finance Ministry said, “In the case of Mauritius, circular no. 789 dated April 13, 2000 continues to be in force, pending ongoing discussions between India and Mauritius.”
A clause in the Budget for 2013-14, which had clarified that a Tax Residency Certificate (TRC) was a “necessary, but not sufficient” condition for enjoying tax benefits under double taxation avoidance agreements (DTAAs) had panicked the markets, since a bulk of FII investments are routed through Mauritius, with which India has a DTAA.
A TRC is proof that a particular entity is registered with the tax authority of a particular country and is liable to pay tax there.
Since the DTAA with Mauritius only talks about tax residence and not beneficial ownership in terms of tax benefits on capital gains, the Government’s clarification intended to state that a TRC will be sufficient for foreign investors from Mauritius to get the benefit. Soon after the clarification was issued, the stock markets corrected and benchmark indices ended with gains after Thursday’s steep fall.
The Finance Ministry also clarified that income tax authorities will not question residence status after a TRC is produced by the foreign institutional investors. “It has been pointed out that the language of the proposed sub-section (5) of section 90 could mean that the Tax Residency Certificate produced by a resident of a contracting state could be questioned by the Income Tax authorities in India. The government wishes to make it clear that that is not the intention of the proposed sub-section (5) of section 90,” it said.
Resident status
It further added that the TRC 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.
The Ministry also said that since a concern has been expressed about the language of sub-section (5) of section 90, this concern will be addressed suitably when the Finance Bill is taken up for consideration.
No unilateral revision of double tax avoidance pact
Finance Minister P. Chidambaram has assured that India will not revise the Double Taxation Avoidance Agreement (DTAA) with Mauritius unilaterally.
In his post-Budget TV interviews, the Finance Minister said, “Unless we revise the treaty (with Mauritius), I don’t think we should do anything unilaterally. Therefore, this clause was not intended to revise the treaty unilaterally; that is an ongoing discussion and that discussion will lead us to somewhere crucial.” He acknowledged that if genuine Mauritius investors take advantage of tax treaty, there is no problem. “But there are reports that the treaty clauses are taken advantage of by some (outside) people. Some would call it misuse. Which is why we commenced negotiation of treaty,” he said.
Around 42 per cent of FDI and about 40 per cent of FII fund flows into India are routed through Mauritius.
> Shishir.Sinha@thehindu.co.in
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