What form will the tax residency certificate take?

The Finance Minister, Mr Pranab Mukherjee, has proposed an amendment in Sections 90 and 90A of the Income tax Act, 1961, in this year's Budget which requires every non-resident to produce a tax residency certificate. The amendment is effective from financial year 2012-13.

Explaining the rationale behind this, the Memorandum to the Finance Bill, 2012, states that “…in many instances the taxpayers who are not tax resident of a contracting country do claim benefit under the Double Taxation Avoidance Agreement entered into by India with the other country. Thereby, even third-party residents claim unintended treaty benefits”.

The certificate will help substantiate the residency condition for claiming treaty reliefs. In some cases an individual taxpayer could claim treaty relief or short-stay exemption on employment income in the country where services are rendered. In other cases the residency condition could be important for beneficial taxation of capital gains while applying for a “make available” clause, or for taking benefit of a lower tax rate under the DTAA.

While proposing the amendment, the Memorandum to the Finance Bill also clarifies that the certificate is a necessary but not sufficient condition for benefiting from the agreements referred to in the Sections.

In the past, there was no specific provision under the statute that called for the certificate to claim benefits under the DTAA. There is, however, a Circular 789 dated April 13, 2000, issued by the Central Board of Direct Taxes in the context of the DTAA with Mauritius. This provides that the certificate of residence issued by Mauritian authorities will be sufficient evidence for the status of residence as well as beneficial ownership under the DTAA. The Supreme Court upheld the validity of this circular in 2003 in its landmark judgement in the Azadi Bachao Andolan (263 ITR 706) case.

It is worth citing a recent decision of E*Trade Mauritius, wherein the residency certificate issued by Mauritius authorities is considered as a presumptive evidence and not conclusive in determining the beneficial ownership of the shares and the gains arising thereon. The same rationale seems to have been considered while introducing this amendment. It is pertinent to ask whether this specific provision would help in reducing scrutiny and consequent litigation.

Currently, the authorities are yet to prescribe a format and the particulars required for the tax residency certificate. In this context, international practice would be instructive. Countries such as the US and the UK have laws in place on this issue. There a taxpayer needs to fill the specified form according to prescribed instructions (Form 8802 for the US, online form for the UK). Similar provisions exist in Dubai, Singapore, Mauritius among other countries. The information required includes name, address, period of stay in the overseas country, need for such certificate, tax year(s) for the certificate needed, name of country that requires the certificate and so on. Specific particulars may, however, differ from one country to another. At the same time, there are countries where such requirements do not exist in the statutes. Under the circumstances, there could be a procedural challenge in terms of the document that would be acceptable to Indian authorities.

In the absence of a specific format for the certificate in India, we have to wait and see what stand the authorities take in regard to transactions in the current financial year. Clearly, taxpayers may face uncertainty during this intervening period and/or due to time lags in obtaining the certificate from other countries. A question arises in the event that the DTAA benefit has been applied and the tax residency certificate TRC was obtained post-transaction — will the certificate validate the benefit of treaty?

To avoid such issues and practical challenges for the taxpayer, there is need for clear guidelines and flexibility in the format and details of the tax residency certificate. Taxpayers are advised to obtain the certificate on time to ensure that beneficial treaty claims are neither disputed nor disallowed due to want of evidence.

Poorva Prakash is Director and Sana Zehra is Assistant Manager, Deloitte Haskins & Sells