The Finance Ministry has clarified that Income Tax Authorities will not question resident status after the Tax Residency Certificate (TRC) is produced by foreign institutional investors (FII).
“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,” the Ministry said in a statement issued within 24 hours of presentation of the Budget.
It further added that The Tax Residency Certificate 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 Finance Bill proposed that the certificate of being a resident in a specified territory outside India will be necessary but not a sufficient condition for claiming any relief under the agreement (Double Taxation Avoidance Agreement). This created confusion in the market which, along with some other reasons, evoked sharp selling, bringing down the benchmark indices of BSE and NSE.
Now the Ministry said 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.
The Ministry recognised that concern has been expressed regarding the clause in the Finance Bill that amends Section 90 of the Income-tax Act that deals with DTAA Double. Sub-Section (4) of Section 90 was introduced last year by Finance Act 2012. That sub-Section requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under DTAA.
DTAAs recognise different kinds of income. The DTAAs stipulate that a resident of a contracting State will be entitled to the benefits of the DTAA. In the explanatory memorandum to the Finance Act, 2012, it was stated that the TRC containing prescribed particulars is a necessary but not sufficient condition for availing of benefits of the DTAA. The same words are proposed to be introduced in the Income-tax Act as sub-Section (5) of Section 90. Hence, it will be clear that nothing new has been done this year which was not there already last year.
The Ministry also informed that in the case of Mauritius, circular no. 789 dated April 13, 2000, continues to be in force, pending ongoing discussions between India and Mauritius.