Norms tightened for foreign investors claiming treaty benefits

Tightening rules for foreign investors claiming benefit of tax treaties, Finance Minister P Chidambaram today said Tax Residency Certificate (TRC) will not be enough to seek benefits under the Double Taxation Avoidance Agreement (DTAA).
The move may affect investments which are routed through low tax countries like Singapore, Mauritius and Cyprus.
"It is proposed to amend Sections 90 and 90A in order to provide that submission of a tax residency certificate is a necessary but not a sufficient condition for claiming benefits under the agreements referred to in sections 90 and 90A," the Finance Bill 2013-14 said.
Chidambaram, however, said government is "not doing anything unfriendly to the foreign investor. You have to satisfy two conditions."

The Section relates to DTAAs entered into with various countries to avail relief from double taxation, exchange of information and recovery of taxes.
"All that the Section (90 A (4)) intends to say is, if you produce a TRC that is a complete answer to your status as a resident. But, whether you are the beneficial owner is a separate issue. The TRC certifies that you are a resident. It does not certify you are a beneficial owner," Chidambaram said.

The changes are effective from assessment year 2013-14.
Chidambaram said tax treaties contain two conditions -- residency and beneficial ownership.

As far as residency is concerned, he said, India will accept the certificate of residency. "As far as beneficial ownership is concerned, that is a question of fact," he added.
Around 42 per cent of FDI and about 40 per cent of FII fund flows into India are routed through Mauritius.
It is believed that a large majority of them are third country investors, which use the tax treaty with Mauritius for saving capital gains tax.