Chidambaram has again come up with yet another proposal that might add to the nervousness among foreign investors seeking investment in India. The Budget proposes that a valid Tax Residency Certificate obtained by a foreign tax payer shall be a necessary, though insufficient, condition for claiming treaty benefits.
The Finance Act 2012 saw a significant amendment with respect to application of tax treaties, whereby, it was made mandatory for foreign tax payers to furnish proof of residency for claiming treaty benefits. The said amendment did not go down well with foreign investors, primarily due to the practical difficulties surrounding the process of obtaining of tax residency certificates from treaty countries.
This amendment was touted to serve only as an impediment in invoking tax treaty benefits by bona fide foreign tax payers. To further complicate the issue, the Central Board of Direct Taxes rolled out statutory forms in September 2012 prescribing the format of the Tax Residency Certificate.
The amendment by the Finance Act 2012, per se, would not have impacted investments routed through tax-friendly jurisdictions such as Mauritius, which are known to issue tax residency certificates with relative ease. However, the proposed amendment may put to test the immensely popular Mauritius route.
This is paradoxical proposal, insofar as the vibes coming out of the Finance Minister’s speech that hinted towards reinstating the faith of foreign investors. In his speech, he has categorically promised to improve communication of policies to remove apprehension or distrust in the minds of investors, including fears about undue regulatory burden or application of tax laws. However, only time will tell how the proposed amendment shall reconcile to the intention of the Government to remove such apprehensions!
The proposed amendment comes as a direct attack on the ratio of the landmark decision of the Apex Court in Azadi Bachao Andolan vs. UOI (2003) 263 ITR 706, wherein, it was held that treaty shopping is permissible. The decision was delivered in the context of a CBDT Circular issued in the year 2000, which clarified that capital gains by a resident of Mauritius would not be taxable in India as long as a valid Tax Residency Certificate is issued in place.
(The author is Partner, MPC Legal. Anuj Mathur, Sr. Associate, MPC Legal, also contributed to the article.)