MUMBAI (Reuters) - India said a tax residency certificate was necessary but no longer enough to claim benefits under double taxation avoidance agreements, according to the Finance Bill tabled in parliament on Thursday.
The amendment is sparking fears that tax authorities would have wider discretion to go after foreign investors who have usually benefitted from investing from countries such as Mauritius that have double-tax avoidance treaties with India.
The suggested amendment comes about a year after poorly written rules to ensnare tax evaders, called the General Anti Avoidance Rules (GAAR), had sparked an outcry among foreign investors, prompting the government to amend their provisions and delay implementation for two years.
The Finance Bill document unveiled on Thursday said the tax residency certificate "shall be necessary but not a sufficient condition for claiming any relief" under the double taxation agreements starting in April 2016, at the same time that GAAR is due to take effect.
The Finance Bill is part of the 2013/14 budget unveiled by Finance Minister P. Chidambaram on Thursday.
Tax analysts said the amendment could create confusion among foreign investors about whether they would be disqualified from taking advantage of double tax avoidance treaties.
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They said the amendment did not make clear what criteria, apart from the residency certificate, tax authorities would use to determine whether an investor had breached rules.
"From an international investor standpoint, the reference to a tax residency certificate being a necessary, but not sufficient, condition for claiming tax treaty benefits is disturbing," said Ketan Dala, a joint tax leader at PwC India.
"This does create significant uncertainty."
The Sensex was hit in part by concerns sparked by the amendment, with the index ending down 1.5 percent.
"The assessing officer may become more powerful," said Homi Phiroze Ranina, an advocate at the Supreme Court of India and former director at the board of the central bank. He predicted more ligitations could result.
Foreign investors are an integral part of Indian markets, given the country needs capital flows to plug a current account deficit that hit a record high in the quarter ended in September.
Chidambaram met foreign investors last month to hear their views about Indian markets.
Net inflows from foreign investors into stocks reached $24.55 billion last year, helping the BSE index gain 25.7 percent.
Chidambaram said on Thursday India would need more than $75 billion this year and next year to fund its current account deficit.
(Reporting by Abhishek Vishnoi; Additional reporting by Subhadip Sircar, Swati Bhat, Archana Narayanan and Manoj Rawal; Writing by Rafael Nam; Editing by Ron Popeski)