Tax Residency Certificate

Significance of Tax Residency Certificate (TRC) for claiming benefit provided under DTAA:

Section 90 of the Income Tax Act empowers the Central Government to enter into an agreement with the Government of any foreign country or specified territory outside India for the purpose of –

(i) Granting relief in respect of avoidance of double taxation,

(ii) Exchange of information and

(iii) Recovery of taxes.

Further section 90A of the Income-tax Act empowers the Central Government to adopt any agreement between specified associations for above mentioned purposes.

In exercise of this power, the Central Government has entered into various Double Taxation Avoidance Agreements (DTAAs) with different countries and has adopted agreements between specified associations for relief of double taxation. The scheme of interplay between DTAA and domestic legislation ensures that a taxpayer, who is resident of one of the contracting country to the DTAA, is entitled to claim applicability of beneficial provisions either of DTAA or of the domestic law.

Sub-section (4) of sections 90 and 90A of the Income-tax Act inserted by Finance Act, 2012 makes submission of Tax Residency Certificate containing prescribed particulars, as a condition for availing benefits of the agreements referred to in these sections.

The provision of section 90(4) is reproduced as under:

“(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate, containing such particulars as may be prescribed, of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.”

This new provisions of requirement of TRC has become applicable from 1 April 2012 (Assessment Year 2013-14) onwards.

If the TRC is not produced by the foreign payee parties, the assessee would not be able to apply beneficial provisions of the DTAA, if any and the tax cost would increase and Payee (or the Payer, if tax cost is borne by it) will have to pay tax on the higher rates of Income Tax Act.

It is also pertinent to note that rate of withholding tax on “fees for technical services” covered u/s. 9(1)(vii) has been increased from 10% to minimum 25% u/s. 115A vide Finance Act, 2013.

The format of details required in TRC as prescribed by the CBDT by inserting new Rule 21AB vide S.O. 2188(E) dated 17th September 2012 is provided as under:

Sub- rule (1):

The certificate referred to in sub-section (4) of section 90 and sub-section (4) of section 90A 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 following particulars, namely:-

Sub-rule (2):

The certificate referred to in sub-rule (1) shall be duly verified by the Government of the country or the specified territory of which the assessee, referred to in sub-rule (1), claims to be a resident for the purposes of tax.

Further, in the Finance Act, 2013 it has been provided that submission of a tax residency certificate is a necessary but not a sufficient condition for claiming benefits under the agreements referred to in sections 90 and 90A.

Thus, in all such cases where the beneficial provisions/tax rates under the DTAA are applicable, the India payer party must seek the TRC from the non-resident party so as to save the substantial tax amount up to 25% of the amount payable.