The finance ministry on Friday issued a clarification on tax residency certificates (TRC) after concerns were expressed regarding the clause in the Finance Bill that amends Section 90 of the Income Tax Act. Section 90 deals with Double Taxation Avoidance Agreements (DTAA).

Finmin clarified that residents of contracting state will be entitled to DTAA benefit and nothing new was introduced in FY14.

It also said that there is no intention of the income tax officials to question TRC holders. TRC will be accepted as evidence of residence while concerns over DTAA will be addressed suitably in the Finance Bill.

The fine print

Subsection 4 of Section 90 was introduced last year by Finance Act 2012. DTAA has recognised different kinds of income. The DTAAs stipulate that a resident of a contracting state will be entitled to the benefits of the DTAA.

Para 4 is important, however it has been pointed out that the language of the proposed subsection 5 of Section 90 could mean that the TRC produced by a resident of a contracting state i.e. a DTAA state could be questioned by the IT authorities in India.

"The government wishes to make it clear that it is not the intention of the proposed Section 5 of Section 90. TRC produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state and the I-T authorities in India will not go behind the TRC and question his resident status," it said.

In the case of Mauritius circular number 789 of April 2000, it continues to be in force.

However, since a concern has been expressed about the language of subsection 5 of Section 90 this concern will be suitably addressed when the Finance Bill is taken up for consideration. This is the 6 para statement from the Central Board of Direct Taxes (CBDT). The key clarification is that the taxman will not go behind the TRC and question resident status. The second part of this statement is circular 789 as far as the Mauritius Tax Treaty is concerned will continue to remain in existence.

The suitable clarification in terms of the language will come when the Finance Bill is taken up for consideration.

Substantial changes in Finance Bill language?

The concern had arisen only because of the language in that section. That as we know is a procedural matter, can only be done inside Parliament, cannot be done outside the house. The Finance Ministry is very well aware of this.

The Finance Minister himself was absolutely open and candid right at the beginning of his press conference yesterday when this question came. He said if there are concerns they will be clarified and he said that several times. Of course the market had by then closed.

As far as the Finance Ministry is concerned it is not going to rock the boat because one of the cornerstones of the Budget is to restore investor confidence and therefore nothing would have been allowed to come in the way of that, certainly not a few words that were part of the proposed amendment to Finance Bill.