Introduction

The Finance Minister of India presented his last Union Budget 2013 (The Budget)amidst rough financial environment. The Budget proposals comein light of the current challenging economic scenario.It is clear that Indian economy is not insulated from the global slowdown. The Indian downtrend has forced the Finance Minister to recommend slew of fiscal/monetary measures to revive the economy. Considering the prevalent constraints of fiscal consolidation, inclusive growth, regaining investor confidence, balancing inflation and managing fiscal deficit, the Finance Minister has navigated boldly through the stakeholder’s expectations in the Budget.

One step that the Finance Ministerstressed was to get India back on the growth path by promoting foreign investment through the foreign direct investment and foreign institutional investment route in India. Contrary to the intent the tax proposals in fact only are a case of lip service. One such instance is the proposed amendment under Sections 90 and 90A to claim tax treaty benefits proposing that mere obtaining of Tax residency Certificate (TRC) would not be sufficient.

The TRC story so far…

Section 90 of the Income-tax Act, 1961 empowers the Central Government to enter into a tax treaty agreement with a foreign country or specified territory outside India for granting relief to avoid double taxation, exchange information and recovery of taxes.The law did not provide for a specific format for the TRC and the taxpayer earlier often used to furnish a certificate in a format at their own discretion.Vide the Finance Act 2012 the law was amended to provide a prescribed particularsfor the TRC. Interestingly, the Memorandum explaining the Finance Act, 2012 clarified that the furnishing of the TRC is necessary but not sufficient. This clarification however did not find a place in the Finance Act, 2012 as legally enacted.

TRC proposal in the Budget

The Finance Bill, 2013 (the Bill)proposes to amend Sections 90 and 90A to include sub-section 5, to provide that the TRC obtained by a non-resident from its country of resident is necessary but not a sufficient condition (evidence) to claim benefits under the agreements referred to in Sections 90 and 90A.The amendment is proposed to take retrospective effect from 1 April 2013, financial year 2012-2013.

Impact assessment

A literal reading of the amendment would indicate that a mere obtaining of TRC would not be enough. This would thus raise a question on theefficacy of Circular No. 789[1] issued by CBDT which was upheld by the Supreme Court twice, in the case of AzadiBachaoAndolan[2]and subsequently validated in the case of Vodafone[3]. It is a well-accepted principle that a Circular can relax the provisions of the law as held by the Supreme Court in the case of UCO Bank[4]. However, what is disturbing is that such a proposition may then have to be tested in case a contrary stand is taken by the tax authorities on a literal reading thus dragging tax payers in a third round of litigation.Further, it is most likely that tax authorities may adopt a look ‘through approach’ to go beyond the produced TRC and examine various factors/conditions to grant tax treaty benefits to the ultimate beneficial taxpayer. The amendment under TRC may now be used as a tool to deny tax treaty benefits and impart discretion in the hands of the tax authorities leading to unnecessary litigation.

Key takeaways

An immediate repercussion was seen as a sharp fall in Indian stock exchanges indicating investor sensitivity on the issue. Infact the Finance Minister and his team have been swift to clarify through a press release dated 1 March 2013 explaining that the Government has no intention of subjecting genuine investors from other tax favoured jurisdictions to a detailed scrutiny. It has also clarified that the TRC produced by a resident will be accepted as an evidence for treaty benefits and the tax authorities will not challenge the validity of the TRC. The Press Release[5] also reinforces that the Circular is good in law until the India / Mauritius tax treaty is amended. The Press Release also emphasized that the amendment will be suitablyreworded so as to create more certainty among foreign investors. It may be important to note that even without the above amendment the tax authorities have denied treaty benefits where beneficial ownership condition for tax residency is not satisfied. In light of the confusion on interpretation of the TRC, it was essential for the Minister to provide clarity on the intent before the enactment of amendments.

Article Authored by :-

N. C. Hegde is ‘Partner’ at Deloitte Haskins & Sells, India

Shailendra S. Sharma is‘Manager’ at Deloitte Haskins & Sells, India



[1] CBDT Circular No. 789 dated 13-04-2000

[2]Union of India v. AzadiBachaoAndolan [2003] 263 ITR 706 (SC)

[3] Union of India v. Vodafone International Holding B.V. [2012] 19 Taxmann 217 (SC)

[4]Uco Bank v. CIT [1999] 237 ITR 889 (SC)

[5] Press Release dated 1 March 2013, Fin Min issues clarification, no intention to question TRC

[1] CBDT Circular No. 789 dated 13-04-2000

[1]Union of India v. AzadiBachaoAndolan [2003] 263 ITR 706 (SC)

[1] Union of India v. Vodafone International Holding B.V. [2012] 19 Taxmann 217 (SC)

[1]Uco Bank v. CIT [1999] 237 ITR 889 (SC)

[1] Press Release dated 1 March 2013, Fin Min issues clarification, no intention to question TRC

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0 responses to “India Budget 2013- Determining certainty on the Tax Residency Certificate”

  1. S K Agrawal says:

    No body thinks for the poor SME’s who pay non-residents off and on thru’ Credit Card. Before, this modification the SME was able to defend non-deduction of TDS relying on various case laws. After TRC has become a necessary condition, this option is also gone.

    A non-resident who is receiving a small sum of money from a SME based in India, will prefer not to do business with the SME rather than bother about the TRC.

    Every body is talking about the Stock Market and the Mauritius.

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