Residency Certificate is Not a Haven for Tax Break

The addition of a few seemingly innocuous words in the Finance Bill relating to tax residency certificate (TRC) will cast a shadow of uncertainty over foreign investors.

Last year, to prevent misuse of tax treaties by residents of a third country (also referred to as treaty shopping), the Finance Act provided that TRC must be obtained, in order to claim tax benefits. Now, a specific provision has been proposed within the Income tax Act that such a certificate will be a necessary but not sufficient condition for claiming treaty benefits and it is introduced with retrospective effect from April 1,2012.

CBDTs circular 789 instructed tax authorities to accept a tax residency certificate as proof of residence in Mauritius.In this context, the Supreme Court in the case of Azadi Bachao Andolan, had also upheld that a tax payer can claim treaty benefits on the basis of a tax residency certificate.

While the courts have upheld the supremacy of the circular on the Mauritius treaty,this might create anxiety in the minds of the investors about additional questions being asked despite holding a valid tax residency certificate, said Shefali Goradia, partner, BMR Advisors.

Pranav Sayta, partner at Ernst & Young, said: The budget proposal is likely to create uncertainty and avoidable litigation in regard to eligibility of treaty benefits. It also seems to unsettle the long established position based on CBDTs circular 789 and the Supreme Courts judgment.

Times of India, New Delhi, 01-03-2013