Finance Bill 2013: Key changes in tax residency certificate

The Finance Bill brought much-needed relief to Dalal Street and foreign investors as the sub section 5 in the Finance Bill was dropped. This means that tax residency certificate (TRC) is enough proof for a foreign investor to claim tax benefits in India. CNBC-TV18's Aakansha Sethi reports.

The Union Budget 2013 had said that the TRC would be a necessary but not a sufficient condition in order to claim treaty benefits. This is important because most of India’s foreign institutional investment as well as Foreign Direct Investment (FDI) comes via the Mauritius route and other such jurisdictions with which India has Double Taxation Avoidance Agreements (DTAA) and capital gains have been waived off.

Earlier the tax department felt that there were a lot of post-box operations in countries like this where there was not a genuine entity that was claiming the tax benefit, it had said that one has to produce resident proof not just with a TRC but supplemented with other documents as well. Since this caused great concern amongst investors, the Finance Bill has dropped this provision which said that TRC is a necessary but not a sufficient condition. It now says that the TRC is enough to prove residency.

Not only this the Finance Bill had earlier also said that a TRC would have to be in a particular format and certain conditions and details would have to be furnished. Now the Finance Ministry said that since every country issues a different type of TRC it will accept all formats and the assessee can furnish the rest of the details. So it really is self-declaration and it dilutes the TRC clause to a great extent. So the message that is being sent out is at this point in time it is foreign investment for the government that is primary.