The controversial line in Budget 2013 on tax residency certificate, a ghostly reminder of Budget 2012, that crept in silently in a rather "clumsily worded clause" is likely to be dropped by Finance minister P Chidambaram during his reply to the debate on the finance bill in Parliament. "The technical oversight" likely to be cited as the reason for altering the clause will help the finance minister replace it with a more investor-friendly worded clause instead. This is aimed to soothe the frayed nerves of investors, particularly those routing funds through the island nation of Mauritius, that had spooked the market to fall to a 3-month low as it shed by 291 points on Budget day.
The finance minister was loud and clear when it came to his sentiments for the investor community. Burdened with a huge current account deficit, the government is banking upon foreign investments to help restore confidence and growth in the economy. Chidambaram did not mince his words, a hint perhaps to his obstructionist cabinet colleagues that it is not just about "welcoming or spurning" foreign investments any more. It is "imperative" and the economic objectives of the government have to be in sync to achieve this goal.
The language used in the TRC, a self goal of sorts, will be replaced with a clause that will restrict its scope to tax residency, removing all fears over beneficiary benefits, will address the issues once for all. The clarifications given by finance ministry and the FM himself have already given ample hints of the government's move.
Routing funds from Mauritius will not be affected by the introduction of the Tax residency certificate clause (mentioned in Finance bill 2013), as it will not override provisions of circular no 789 that governs investments routed through Mauritius. This circular peculiar to the Mauritius double taxation avoidance agreement (DTAA)
Allows companies to get the benefits of both residency and beneficiary if
Supported by a TRC.
Confusion arose as the clause says that the TRC alone may not be "a sufficient condition for availing the benefits of DTAA. This has left companies investing through Mauritius in a tizzy as they have availed benefits under the DTAA only based on the TRC as per the rules prescribed now. The markets had tanked on Thursday after the budget was presented as the introduction of this clause brought in fears of the re-introduction of GAAR through the backdoor.
Investors routing money through Mauritius will continue to get the benefit under circular 789 that says that TRC alone will suffice for the benefits under DTAA for both beneficiary and tax residency proof. The terms and conditions currently applicable for investments from Mauritius will not be replaced by this new clause and the amendment will make no difference to them.
Discussions on the implication of this clause were discussed at length. The clause mentioned in last year's explanatory memorandum cannot be acted upon till it becomes a part of the act. It is believed that introducing this at a later stage after the negotiations over the DTAA with Mauritius is completed will make more sense, leaving little scope for confusion. The clause introduced in the finance bill 2013 seeks to amend Section 90 of the Income-tax Act that deals with DTAA says that the Tax Residency Certificate containing prescribed particulars is a necessary but not sufficient condition for availing benefits of the DTAA.
DTAAs recognize different kinds of income. The DTAAs stipulate that a resident of a contracting state will be entitled to the benefits of the DTAA.
