Tax residency certificate now mandatory for foreign investors

New Delhi: India has made it mandatory for all foreigners to furnish a tax residency certificate of their home country to claim benefits under the double taxation avoidance agreement. This will make the process of claiming tax credit easier for foreigners by removing the arbitrariness in the earlier regime.

The Central Board of Direct Taxes, the apex direct taxes body, has notified changes to the income tax act prescribing a tax residency certificate. All non residents are entitled to claim benefits under the domestic tax law or the relevant tax treaty to the extent it is more beneficial to them.

Treaty benefits in India is available to a person who is a resident of the treaty country. While there was no requirement prescribed under the law to furnish a Tax Residency Certificate (TRC) from the country of residence to claim treaty benefits, the revenue authorities were asking for such a certificate wherever treaty benefit was claimed.

Tax experts say this will also makes life easier for Indian companies having overseas operations as well and foreign investors in India. A prescribed format will allow foreign residents to know in advance the essentials required to claim tax credits, said said Sudhir Kapadia, national tax leader, Ernst & Young.

"This would be very useful for Indian multinationals as they will be able to get a TRC in a speedy manner as there is a benchmark template prescribed unlike at present depending on the discretion of tax officers," he said.

The TRC for availing tax benefits was proposed in the 2012-13 budget. "It is noticed that in many instances the taxpayers who are not tax resident of a contracting country do claim benefit under the DTAA entered into by the Government with that country. Thereby, even third party residents claim unintended treaty benefits," said the memorandum to the 2012-13 Budget.

The TRC would have the tax identification number of the assessee, its residential status for the purposes of tax, period for which the TRC is applicable and address of the assessee during that period. However, experts are skeptical about TRCs effectiveness.

"While the notification specifies the details that a TRC of another country should have, it would be worthwhile to wait and watch whether the country issuing such a TRC would be willing to specify all such details in the TRC.

Further, in case the assessee is not able to obtain all details as specified in the TRC, would the Indian Revenue authorities deny the exemption which otherwise would be available to them?," said Homi Mistry. Partner, Deloitte Haskins & Sells.