Tax residency certificate mandatory for foreign investors

As per a Government of India notification dated 17^th September 2012, all foreign investors will have to produce tax residency certificates (TRC) of their base nation to claim benefits under the double taxation avoidance treaty from April 1, 2013.

The amendments to the Income Tax Act, 1961will take effect from April 1, 2013 and will apply in relation to the assessment year 2013-14 and subsequent years.

The notification amends Section 90 and Section 90A of the Act dealing with taxation of foreign investment and tax benefits under the Double Taxation Avoidance Agreements (DTAAs).

Currently, India has a total of 84 DTAAs with foreign countries.

The TRC for availing tax benefits was proposed in the 2012-13 Budget, presented by the then Finance Minister Pranab Mukherjee.The TRC to be obtained by an assessee, not being a resident in India, from the Government of the country or the specified territory, shall contain the name of the assessee, status as to whether it is an individual or company, its nationality and country wherein it is registered or incorporated.

Besides, the TRC should also have the tax identification number of the assessee, its residential status for the purposes of tax, period for which the TRC is applicable and address of the assessee during that period.This requirement also has implications for NRIs who have India filing requirements. They will also be required to produce a tax residency certificate to claim benefits under DTAA in India.

Under a clause in the Double Taxation Avoidance Agreement (DTAA) entered into between two countries, the assessee can take the advantage of paying capital gains tax in either of the two nations.

The scheme of interplay of treaty and domestic legislation ensures that a taxpayer, who is resident of one of the contracting country to the treaty, is entitled to claim applicability of beneficial provisions either of treaty or of the domestic law.

A Memorandum to the 2012-13 budget mentioned 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. 

Taxpert answers!

Ranjini is a naturalized citizen of USA and a person of Indian origin. She has inherited agricultural land from her grandmother and also received a gift of another 20 cents of land a few years ago from her parents. Other than this, Ranjini also has some movable property in the form of jewels and silver in India and expects to inherit a bulk of her parents’ assets including land, shares, jewels, silver, bank deposits etc. Ranjini has the following queries:

1. Is there any limit on the gifts that her parents can send from India?

                    

Generally gift remittances up to $5000 may be made without prior approval of RBI and anything above that amount would require prior approval from RBI.

2. Would Ranjini be able to repatriate proceeds from sale of land – both agricultural and non agricultural or repatriate rent is the property is rented out?

An NRI/PIO/Foreign national of non Indian origin can inherit immovable property in India from a person who was resident in India. However citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan would need specific approval from RBI.

An NRI/PIO can rent out the property without the approval of the Reserve Bank. Rent received may be credited to NRO / NRE account or remitted abroad. Reserve Bank has delegated powers to the Authorized Dealers to allow repatriation of current income like rent, dividend, pension, interest, etc. of NRIs/PIO who do not maintain an NRO account in India based on an appropriate certification by a Chartered Accountant, certifying that the amount proposed to be remitted is eligible for remittance and that applicable taxes have been paid/provided for

Ranjini will be able to repatriate proceeds from sale of land subject to specified limits. Permission is available to the NRIs/PIO to repatriate the sale proceeds of the immovable property inherited from a person resident in India. NRIs/PIO may repatriate an amount not exceeding USD one million, per financial year, on production of documentary evidence in support of acquisition / inheritance of assets, an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes.  

Additionally, Ranjini will also need to take care of foreign asset and gift reporting requirements in USA – her adopted country. 

Query 2: 

Are persons resident in India required to surrender foreign exchange acquired/held by them?

Answer:

Yes. Residents receiving foreign exchange from abroad by way of gift, inheritance, remuneration for services rendered, etc. are required to bring it to India within three months acquiring the foreign exchange and surrender it to an authorised dealer within seven days from its receipt in India. This rule also applies to non-residents who return to India for a purpose other than temporary visits.

Query 3:

Can shares/debentures be given away by NRIs as gifts to relatives?

Answer:

Yes. Reserve Bank has granted general permission to NRIs to transfer, by way of gift, shares, bonds and debentures of Indian companies held by them with Reserve Bank's permission to their resident close relative/s.