TRC sufficient proof of residence for FIIs: KPMG

The Finance Ministry today clarified that foreign institutional investors who have the tax residency certificate are entitled to tax benefits under the double taxation avoidance agreement.

“When the Finance Minister says Circular 789 continues to be in force, that itself is sufficient. It is not living in hopes and expectations. The statement which has come from the Ministry of Finance is quite categorical,” said Dinesh Kanabar of KPMG told CNBC-TV18. He goes on to say that TRC is sufficient proof of residence for FIIs who want to avail benefits under the DTAA. The mention of the TRC is yesterday’s Union Budget caused panic on Dalal Street, sparking off a sell-off rally which took the Nifty to three-month lows. Below is an edited transcript of his interview with Siddharth Zarabi. Q: About 90 percent of people out there believe the Finance Ministry’s clarification is good enough. In terms of the text that you would like to see as far as the Tax Residency Certificate (TRC) issue is concerned and also the underlying issue of Circular 789, what would you want the clause to now read in the Finance Bill, as and when it is taken up for debate? A: When the Finance Minister says that Circular 789 continues to be in force, that itself is sufficient. It is not living in hopes and expectations. The statement which has come from the Ministry of Finance is quite categorical. If you look at India-Mauritius treaty, there are certain clauses where the rates get reduced only if the person who earns the income is a beneficial owner. So for example, on royalties, interest, dividends, etc the person who earns the income has to be the beneficial owner, only then the rate of tax goes down. There is no such requirement for capital gains purposes. The note from the MoF reiterates that capital gains is one of those clauses in the tax treaty for which beneficial ownership is not required and therefore this clause has no implication whatsoever. To your question as to what is it that the wordings could be, I think the way the section is worded today, all that it needs to say is two things. One is that Circular 789 continues to be in force, which has been put out in this note. Secondly, that TRC is sufficient for the purposes of residence. There may be other clauses within a treaty which need to be independently satisfied. Q: Did you sense that there was intent, atleast as far as the Income Tax administration is concerned, certainly not the policy level and the finance ministry by itself, was by some ways to go behind the TRC suspecting that it is only a cover and therefore more needs to be investigated as far as giving treaty benefits are concerned. Was that the real intent or was it just a typing issue? A: It does not make sense to speculate as to what was intended or whether there was a typing issue. Last year’s amendment basically provided for the TRC in a prescribed format. This particular language was there in the memorandum explaining the provisions, but was not there in the Act. This year it was put in the Act, which is what created this entire issue out there. Had the language continued to be as it is, without the clarifications being issued, then it could have led to a potential issue of subjectivity at the tax office. Rather than go behind what was intended or otherwise, the important thing is that the clarification which has come at this point of time is categorical, it does not merit any further interpretation. It is not just a question of intention, it is a question of stating that Circular 789 continues to be enforced. So as far as capital gains is concerned, beneficial ownership is not an issue at all, which is what the treaty says and once that is accepted nothing further remains really. Q: Last year the entire investor community turned negative on account of General Anti Avoidance Rule (GAAR). This is something that was perhaps not anticipated. In terms of tax sensitivities, any other issues that you would want to be clarified at this stage? A: The one issue which needs to be clarified and which remains pending is the issue on the retrospective amendment to Section 9. This is not on the issue as to whether a retrospective amendment ought to ought not to be there, but that the wordings of Section 9 are quite ambiguous. That ambiguity is currently impacting overseas transactions where some part of the assets is in India. I do hope that the FM does clarify many of those things which have been already set out in the Shome committee report which actually merits an immediate implementation. So, for example, what is the meaning of ‘substantial assets in India’? Is the threshold 10 percent, 20 percent or 50 percent, are listed company transfers covered etc. These issues need to be covered immediately.