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Chidambaram allays fears over tax residency certificates from Mauritius

March 02, 2013 14:57 IST

The finance ministry on Friday eased investor fears over tax residency certificates (TRCs) of those investing from Mauritius, which soothed the markets after Thursday’s fall.

It said the tax authorities would not go beyond the tax residency certificate (TRC) in case the investor concerned was from Mauritius. For other countries with which India had double taxation avoidance agreements (DTAAs), tax authorities would also ask for other documents also, depending on the provisions of the respective treaties.

After the clarification, the BSE Sensex today bounced back from three-month lows to end nearly 57 points higher at 18,918.52. The NSE Nifty rose by 26.65 points to 5,719.70. Foreign institutional investors (FIIs) net bought shares worth Rs 629 crore on Friday after turning a net seller on Thursday, for the first time in 2013.

The island nation is the biggest source of FIIs and foreign direct investments (FDIs) into India.

The finance ministry said in a statement here: “In the case of Mauritius, circular number 789, dated April 13, 2000, continues to be in force, pending ongoing discussions between India and Mauritius.”

Explaining the statement, Parthasarathi Shome, advisor to the finance minister, told Business Standard that the DTAA between India and Mauritius says that circular 789 is sufficient for both residency and ownership. And the circular stands, pending negotiations between India and Mauritius over revision of DTAA.

It meant that if an investor had a TRC, explained ministry officials, it would be taken as proof of residence and ownership, and benefits under the treaty could be availed.

Under the treaty with Mauritius, investors with TRC from the island nation need not pay capital gains tax in India. Mauritius does not have capital gains tax.

The other issue was about an investor coming from a jurisdiction other than Mauritius.

Shome said for other countries, a residency certificate was a proof for residence, but not sufficient for beneficial ownership. “So, residence has to be proved in case the question is raised.” Then comes the issue of beneficial ownership. “We are saying we will go through the treaty provisions with respect to that country and, if beneficial ownership is proved to reside in that country, then treaty benefits will be given; if not, then the domestic law for non-residents will prevail. It reflects international practice,” Shome added.

The Finance Bill, 2013, had proposed that TRC containing prescribed particulars was a necessary but not sufficient condition for availing benefits of DTAA. Officials explained that this provision was for those coming from jurisdictions other than Mauritius, depending on provisions of treaties with those nations.

This provision was in the explanatory memorandum to the Finance Act, 2012. In this Budget, however, the provision was added to the Finance Bill itself.

“The same words are proposed to be introduced in the Income Tax Act as Sub-section (5) of Section 90. Hence, it will be clear that nothing new has been done this year which was not there already last year,” the statement by the ministry said.

The ministry clarified that TRC would be taken as a proof of residence for these jurisdictions. For beneficial ownership, however, it may check other documents as well. As there were objections to the language in the Finance Bill, the ministry said these would be addressed when the Bill was taken up for discussion.

The statement said it had been pointed out that the language of the proposed provision could mean that TRC produced by a resident of a contracting state could be questioned by the Income Tax Authorities in India. “The government wishes to make it clear that it is not the intention of the provision,” the statement said.

“Most fears seem to have been put to rest,” said Anish Thacker, Partner, Tax & Regulatory Services at Ernst & Young. “The intention seems to be not to change the current position and it would be premature for anybody to react adversely. However, it has to come through in the language of the proposed legislation.”


Complete coverage: Union Budget 2013-14

BS Reporters in Mumbai