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Senior Indian Minister Kapil Sibal has sought to allay fears among overseas Indians about a proposed taxation law and his government has issued a new rule for issuing Tax Residence Certificates to non-residents. During a recent visit to the Gulf, Sibal met members of the Indian community and assured them that certain residency conditions in the proposed Direct Tax Code (DTC), which NRIs have described as harsh and impractical, would be reconsidered.
According to the new definition in the DTC, overseas Indians present in India for more than 60 days in a financial year will be treated as Residents. According to the existing law, NRIs are liable to pay taxes on their global income if they stay in India for more than 182 days in a financial year. The new proposed tax code calls for reduction in the number of days from 182 to 60, which hasn’t been approved by the parliament yet.
This change would have an adverse impact on the NRIs frequently visiting India either for personal or business visits, since, they would need to plan and check the duration of each of their visits in any year to avoid becoming Residents for the purpose of taxation.
Further, there are undesirable omissions with regard to wealth tax provisions. Some beneficial provisions for Resident Not Ordinary Residents, that is for those returning to India, do not exist in the DTC with respect to Wealth Tax.
One really doesn’t know how well-informed Sibal is about these provisions that relate to ministries he’s never handled, but the top UPA functionary was quick to tell the NRIs that “The matter has never come to the cabinet and will never come to our mind. It is only in your mind, not ours. We have always treated you as our own.”
He was quoted by media in the UAE as saying that the matter pertaining to the DTC has not come to the cabinet and “it may never come to cabinet.” He was further quoted to have made a rather surprising statement to the effect that his government will not implement “any such tax code.”
Other than that, in the case of non-residents, the proposed DTC specifically provides that a non-resident shall not be entitled to claim relief under the provisions of the relevant tax treaty, unless, a certificate of tax residence is obtained by him from the tax authority of the overseas country in a prescribed form. While this certificate is practically required under the current provisions also (if the case was picked up for assessments); in the proposed DTC the same will become a mandatory requirement.
The Finance Act, 2012 made it compulsory for a non-resident to submit a TRC (tax residency certificate) prescribing particulars for utilising tax treaty benefits. The Central Board of Direct Taxes has now issued a notification inserting Rule 21AB (effective from assessment year 2013-14) providing for particulars to be included in the TRC such as name and address, legal status, country or specified territory of incorporation, tax identification number, residential status and the period for which the certificate is applicable for a non-resident. It specifies that the TRC should be verified by the government of the country to which such a non-resident claims to be a resident of for tax purposes. It prescribes the procedure and format in which a resident can apply for a TRC.
According to media reports, submission of TRC by a foreign company to Indian income tax authorities is now mandatory, but not a sufficient condition for availing tax treaty benefits. The TRC requirement is aimed at addressing the problem of treaty abuse.
In the Union Budget for 2012-13, the Indian government had amended the income tax law to stipulate submission of TRC for availing treaty benefits. “It is noticed that in many instances the taxpayers who are not tax resident of a contracting country do claim benefit under the DTAA entered into by the Government with that country. Thereby, even third party residents claim unintended treaty benefits,” said the memorandum to the 2012-13 Budget. A non-resident looking to claim treaty benefits shall now have to furnish in the TRC particulars such as assessee’s tax identification number, residential status for the purpose of tax and period for which the certificate is applicable. However, the details of non-resident’s beneficial ownership have not been sought.