Ever since the 2013 Union Budget, the requirement of Tax Residency Certificate (TRC) for claiming tax treaty benefits has come under focus. This could be attributed to the concerns raised among investors over the amendment proposed by the Finance Bill, 2013, due to which treaty benefits could possibly be denied on grounds that a TRC is not sufficient for treaty eligibility.

While Finance Minister P. Chidambaram attempted to address investor concerns by clarifying the purported intent of the proposed amendment, there was an expectation that the Government would also bring in suitable amendments to clarify the position. The amendments that have been introduced address a few concerns, but raise others as well.

There have been several controversies relating to denial of tax treaty benefits by the tax authorities on the basis of questioning tax residency. The controversy has been getting bigger, especially with regard to claiming capital gains tax exemption under the India-Mauritius tax treaty. The Central Board of Direct Taxes (CBDT) had issued a circular, dated April 13, 2000, clarifying that wherever a certificate of residence is issued by the Mauritius tax authorities, it will constitute sufficient evidence for accepting the status of the residence of the Mauritius entity with respect to income from capital gains on the sale of shares.

The Supreme Court, in the case of UOI v Azadi Bachao Andolan, passed a landmark judgment upholding the validity of the above-mentioned circular. However, the Supreme Court, in the case of Vodafone International Holdings BV vs. Union of India, held that the same circular would not preclude the tax authorities from denying the tax treaty benefits if it is established that the Mauritius company has been interposed as the owner of the shares in India at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance.

The Finance Act 2012 introduced provisions (as applicable from FY 2012-13) mandating furnishing of TRC with prescribed particulars in order to avail tax treaty benefits. On September 17, 2012, the CBDT issued a notification specifying details required to be obtained in the TRC, which included name of the taxpayer, residential status for the purposes of tax, and so on. The notification gave rise to a set of concerns, such as date of its applicability, consequences of non-availability of TRC, practical difficulties in obtaining TRC from the overseas country, and implications when certain information prescribed are not mentioned in the TRC, which the taxpayers were just getting adjusted to.

The Finance Bill 2013 has sought to further amend the provisions. The Bill now provides that in order to claim tax treaty benefits, a taxpayer needs to furnish:

a certificate of his/ herbeing a resident of the relevant country; and

such other documents and information as may be prescribed.

The most recent amendment dispenses with the requirement that the TRC should be in the format prescribed by the CBDT. This should help in addressing the practical challenges that taxpayers often faced in obtaining TRCs that contained the prescribed particulars. However, the requirement that a taxpayer needs to furnish additional documents and information as prescribed raises some concerns. One would hope that this will not put an onerous burden on taxpayers, which could result in denial of treaty benefits to bona fide tax residents on purely procedural grounds.

A tax treaty generally provides for a higher threshold for taxation of a non-resident as compared to the domestic tax law. This higher threshold could relate to: lower withholding tax on incomes in the nature of royalty; interest and fees for technical services; a broader definition for characterising certain income streams; higher threshold for creating a taxable presence or even exempting certain incomes from tax. Hence, a denial of tax treaty benefits could often have a material consequence for non-resident taxpayers. Taxpayers may therefore need to wait for the Government to prescribe the documents and information that have to be furnished, and thereafter consider steps for ensuring their entitlement to treaty benefits.

The author is Tax Partner, Ernst & Young

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