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Finance Minister P Chidambaram himself went into damage control mode and clarified that the government would not question the validity of tax residency certificates (TRC) held by foreign investors who are based in countries with double taxation avoidance agreements (DTAA) with India. Overseas investors had expressed worries that India could begin to question the validity of those certificates altogether.
Foreign investors are integral to 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.
Mauritius is a popular source of foreign investments into India, accounting for around 40% of portfolio inflows according to some estimates.
Business Standard removes the clutter around the TRC
It is a fact: people always try to find ways to avoid taxes. That's where tax havens such as Mauritius come into picture. India signed a double-taxation avoidance agreement (DTAA) with the island nation -- and investors routing money through Mauritius do not have to pay taxes in India.
It is a fact: people always try to find ways to avoid taxes. That's where tax havens such as Mauritius come into picture. India signed a double-taxation avoidance agreement (DTAA) with the island nation -- and investors routing money through Mauritius do not have to pay taxes in India.
What are tax residency certificates?
In April 2000, India suspected that a large number of investors were misusing Mauritius route to avoid paying taxes. Therefore, the government asked the FIIs to produce tax residency certificates issued by Mauritian government. If the FIIs could produce the certificate, it will be accepted at face value and tax sleuths will not examine the authenticity of the claim of domicile.
What does a TRCs contain?
The TRC requires overseas investors to furnish details such as tax identification number, residential status for the purpose of tax, period for which the TRC is applicable and address of the assessee during that period.
The government had, in the last budget, made it mandatory for all foreigners to furnish a TRC from their home country to claim benefits under the double-taxation avoidance agreement.
How they won the tax break
Article 13 of the pact deals with capital gains or profit you make while flipping stocks. Under a sub section capital gains derived by a company or a firm cannot be taxed in India. It can be taxed only in Mauritius, which doesn't have a capital gains tax. That means investors get to keep all the money.
What about other tax havens?
India has signed 84 double taxation avoidance pacts with a number of countries and jurisdictions. But no two agreements are the same. Mauritius, UAE, Singapore have provisions that investors have found very attractive to route money into India.
Why the confusion now?
Many in India and elsewhere have questioned the creditability of the certificates. They are of the views that the certificate only proves that the funds are registered in the tax havens from where they operate but do not disclose who have actually shovelled money through these firms. There have been charges that investors -- concealing their identity behind corporate veil -- could be people who route their black money through these firms to legalise money.
What has the Finance Ministry done?
It has moved an amendment to Finance Bill 2013 -- sub section 5 of Section 90 of the Income tax Act -- which says that tax residency certificates are "necessary but not a sufficient condition for claiming benefits" under the double taxation avoidance agreements.
What has the government done to retrieve the situation?
It clarified that the certificate would be enough and no other testimonial would be required and also promised to change the language of the amendment.
