Prove your residency to claim tax treaty relief’ — this seems to be the new mantra of revenue authorities. Based on an amendment in Finance Act, 2012 and a circular issued subsequently by tax authorities, a Tax Residency Certificate (TRC) is required for all non-resident assessees who wish to claim double taxation avoidance agreement (treaty) relief in India.
This is a welcome move for expatriates working in India who were until now unable to obtain a TRC from Indian tax authorities in order to claim treaty relief in their home country.
While the TRC is meant to avert false claims, it calls for additional documentation.
Further, an individual assessee from India who goes abroad on an international assignment (or someone visiting India on short assignments) may be taxed in both countries due to factors such as residential status, salary receipt, rendering of services and so on. Such individuals may claim treaty relief to avoid double taxation. If the individual is a non-resident in India, he would require a TRC from his country of residence to claim treaty relief in India.
The revenue authorities have prescribed a format for the TRC they issue and require the same details in the TRC obtained from foreign countries:
Name of assessee;
Status of assessee;
Nationality;
Country of incorporation;
Assessee’s Tax Identification Number in the country of residence;
Residential status for the purposes of tax;
Period for which the certificate is applicable; and
Address of the taxpayer for the above period.
Practical challenges
Many foreign countries may not issue a TRC or include the particulars sought by Indian authorities. This raises the question of whether the authorities would relax the rules in such cases. Also, there may be countries which do not issue a TRC, leaving the assessees unsure of getting a treaty relief from Indian authorities.
While the law seems to imply that a TRC is mandatory for treaty relief, procedural requirements should not be allowed to defeat the purpose of tax treaties. Hence, one could argue that non-availability of TRC should not prevent a non-resident assessee from claiming treaty relief. However, the authorities’ view on this is awaited.
It is unclear whether non-resident assessees should get a TRC before taxes are withheld at source, at the time of filing the return, or later when the authorities ask for it.
Also, the Act is silent on what an assessee should do after getting a TRC — should it be submitted to revenue authorities or to the tax deductor, or should it be submitted at all.
The TRC concept is still evolving in India and needs to be fine-tuned over time. With greater clarity on the procedural aspects, it can bring greater transparency to treaty claims.
Anand Dhelia is Senior Tax Professional, Ernst & Young