Budget Analysis: TRC existed in circular, brought into Act now: Shome

Parthasarathi Shome, advisor to the Finance Minister, explains on CNBC-TV18 why the tax residency certificate issue should not spark off fears for foreign institutional investors again.

He says that the FM only stated this point in the Union Budget to bring into the law, as it was only existent as a circular form earlier. “The idea was actually very simple, that given circular 789 and given the acceptance of the tax residency certificate, the TRC would be sufficient to prove residency,” he said. Shome says that the TRC is important to help prove residency, but more importantly, separate ownership. Some double taxation avoidance agreements (DTAAs) do cover these points, but this law will bring all these under one umbrella in a comprehensive way. Below is an edited transcript of his interview with Shereen Bhan. Q: Everything was fine and it looked like it may have been a bit lackluster, no real game changer, but then came this business of the tax residency certificate (TRC). And just like the retrospective amendment spooked the market the last time, it was the TRC this time around. But why has section 90 (A) been amended? What was the need to do this if you have anyway decided that General Anti Avoidance Rule (GAAR) is going to be pushed to 2016? A: There might have been a matter of drafting. The Finance Minister has already explained that he is going to redraft if need be. But the idea was actually very simple, that given circular 789 and given the acceptance of the tax residency certificate, the TRC would be sufficient to prove residency. But, residency is to be separated from beneficial ownership which that can be of royalty, dividend and of interest. Those matters are all covered in respective Double Taxation Avoidance Agreements (DTAAs). Some cover only royalties, some cover others and so on. So that was going to be brought into the law in a comprehensive way. It already existed in the circular form and this year it was going to be brought smoothly into the law. Q: Does circular 789 stand? Has it been withdrawn, has it not been withdrawn? A: As far as I know it stands and it is enough for proving residency of a company. However, as before, it is not sufficient for beneficial ownership. This is already mentioned in the DTAA and it is now appearing in the law. It was already in circular form last year, and this year it has simply been brought into the law. So that separation is going to be clarified. Watch the accompanying video for the full interview.