Finance Ministry Clarification Regarding Tax Residency Certificate (TRC)

Press Release dated 01.03.2013 issued by the Ministry of Finance

Concerns on Language of DTAA To be Addressed When Finance Bill is Taken up for Consideration

Concern has been expressed regarding the clause in the Finance Bill that amends section 90 of the Income-tax Act that deals with Double Taxation Avoidance Agreements. 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 recognize 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 Tax Residency Certificate containing prescribed particulars is a necessary but not sufficient condition for availing 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.

However, 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 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.

In the case of Mauritius, circular no. 789 dated 13.4.2000 continues to be in force, pending ongoing discussions between India and Mauritius.

However, 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.

6 comments on “Finance Ministry Clarification Regarding Tax Residency Certificate (TRC)
  1. JAMES GEORGE says:

    Tax residency certificate is required by some banks to get benefit under DTAA. However the place from where this document is available in QATAR is not known even by Banks like Federal bank and they deduct tax on interest earned at 30% without the consent or providing information to investors. Pl. advise from where TRC is available in Qatar.

  2. Tapas Misra says:

    Good to see the government being responsive.

  3. vswami says:

    Intended reference was to BSR’s article titled -“Booster shot for economy”, wherein the FM has been copiously commended for his exemplary ingenuity in “a judicious blend of well-conceived incentives and imaginative initiatives.”

  4. vswami says:

    On the points of doubt /reservation raised, one wonders whether even the FM and / or his coterie would have any satisfactory answer or solution to offer !.
    Be that as it should, In the current Budget, wrt the changes proposed with the stated aim of rationalising the applicable ROT, it reads:
    “147. Another case is the DISTRIBUTION OF PROFITS by a subsidiary to a foreign parent company in the form of royalty…..”
    No one concerned, whatever be the individual’s level of ingenuity or faculty to understand, would not have failed to abruptly realise the wisdom, or lack of it, of the draftsman’, if not of the FM, in construing the very concept of ‘royalty’. The point is, it has come to be given such a violent twist as to offend the thus far obtaining common understanding thereof; even assuming that were dictated by the often claimed human faculty of ‘common sense’.
    To dilate: One would have thought that ‘royalty’, basically an item of ‘expenditure’, – in accounting or legal or any other known parlance, or sense of the concept,, – could be, howsoever remotely, or with any of the ‘imaginative initiatives’- so generously attributed to the chief architect (FM) in certain quarters , read BSR’s article in Business Line – “Budget steers clear of populism” – be so contemptuously dubbed or sinfully decried as a ‘DISTRIBUTION OF PROFITS’.
    For another view but with a different stroke (rooted in self-same ‘imaginary initiative’ or individual perspective), whatever one wishes to call it, refer indiacorpblog -” Budget 2013: Taxation as a Solution to a Governance Problem”

    (leaving open to the enlightened Readers, to reflect and edit – add / modify)

  5. Gopal says:

    The tax payable in respect of any payment to Non Resident is deductible by way of tax deduction at source. Does the requirement of TRC mean that tax has to be witheld to the extent stipulated in the Income tax Act unless TRC is available with the payer of income at the time of payment.

    Enhancing tax on Fees for Technical Services and royalty is self defeating as the tax will have to be borne by only the resident payer. Technical know how is generally exclusive and invariably the provider of technical services insists on NET payment in which case the payment has to be grossed up and the tax paid by the resident taxpayer. In this age of technology, he has no option but to get the services even though it costs more due to the higher tax and the provider of technical services does not suffer any tax. The alternative is obviously use the existing technology which over time will get out of date and the taxpayer become uncompetitive.

  6. vswami says:

    As reported elsewhere, in his post-budget speech, besides the condition of ‘residency’, the FM has made a mention of another condition; that is, of “beneficial ownership”.

    That reads, – “He stated that this merely means that certain treaties MAY HAVE two conditions — a condition of residency and BENEFICIAL OWNERSHIP . As far as residency is concerned, TRC would be acceptable and for beneficial ownership it will be a question of fact and law. ”
    (Highlights supplied)

    To one’s memory or knowledge, none of the treaties as of now (to double check with experts) contain any such ‘condition’ of ‘beneficial ownership’, much less any explicit one, – as seem to be implied by the FM.

    On the premise that, in all, or anyone or more of, the treaties, there is no such ‘condition of beneficial ownership’, that too in unequivocal and indisputable terms, then it is NOT, according to the very scheme of things, so also as per the categorical view taken by the SC, a matter which could be regarded to be open to any debate or dispute, or even adjudication by domestic court , on a unilateral basis, as if it were a question of “fact and law”.

    On the contrary, in case of any conflicting stance on any such treaty related or connected issues, the treaty partners would, strictly speaking, require to have it settled amicably by having recourse to the only treaty provision, known as “MAP’.

    The applicable OECD Guidelines, besides case law and published articles in public domain (e.g. (2008) 13 CPT pg. 514, (2009) 176 TAXMAN pg. 129) may be noted to throw sufficient light on the foregoing aspects.

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