Finance Ministry Clarification Regarding Tax Residency Certificate (TRC)

Press Release dated 01.03.2013 issued by the Ministry of Finance

 

Concerns on Language of DTAA To be Addressed When Finance Bill is Taken up for Consideration

 

Concern has been expressed regarding the clause in the Finance Bill that amends section 90 of the Income-tax Act that deals with Double Taxation Avoidance Agreements. Sub-section (4) of section 90 was introduced last year by Finance Act, 2012. That sub-section requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under 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.

 

In the explanatory memorandum to the Finance Act, 2012, it was stated that the Tax Residency Certificate containing prescribed particulars is a necessary but not sufficient condition for availing benefits of the DTAA. The same words are proposed to be introduced in the Income-tax Act as sub-section (5) of section 90. Hence, it will be clear that nothing new has been done this year which was not there already last year.

 

However, it has been pointed out that the language of the proposed sub-section (5) of section 90 could mean that the Tax Residency Certificate produced by a resident of a contracting state could be questioned by the Income Tax Authorities in India. The government wishes to make it clear that that is not the intention of the proposed sub-section (5) of section 90. The Tax Residency Certificate produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state and the Income Tax Authorities in India will not go behind the TRC and question his resident status.

 

In the case of Mauritius, circular no. 789 dated 13.4.2000 continues to be in force, pending ongoing discussions between India and Mauritius.

 

However, since a concern has been expressed about the language of sub-section (5) of section 90, this concern will be addressed suitably when the Finance Bill is taken up for consideration.

Eurozone factory activity continues to decline...

 Eurozone Manufacturing PMI again contracted in February, although it was unchanged from January at 47.9 as Germany stabilized but as all other countries except Ireland declined. "The combination of a revival in export orders and resilient domestic demand has helped propel Germany’s growth so far this year, while deteriorating domestic demand is holding back the economies of France, Italy and Spain,". Mean while, The eurozone's jobless rate increased to yet another record of 11.9% in January from 11.8% in December and vs expectations of 11.8%. The number of people without a job rose by 201,000 on month to just under 19M. Youth unemployment was 24.2%, with the figure in Spain more than double that at 55.5%.

Freddie Mac swings to record net profit of $11B.

After generating losses of $90B from 2008-2011, Freddie Mac (FMCC.OB) swung to its first profit since 2006 last year, earning a record $11B vs a loss of $5.3B in 2011. Freddie's Q4 profit climbed more than seven-fold to $4.5B. The mortgage giant has benefited from the improving economy as home prices have stabilized and mortgage delinquencies declined. Freddie will pay a $5.8B dividend to the Treasury in March.

Lloyds sinks despite smaller net loss.

Lloyds' (LYG) 2012 pretax loss narrowed to £570M from £3.5B in 2011, with the bank's earnings hurt by the provision of £3.575B for the mis-selling of payment-protection insurance, including £1.5B in Q4. Lloyds' underlying profit jumped to £2.61B from £638M. The U.K. government reportedly plans to start selling its 39% stake in Lloyds when the bank's share price hits 61 pence, which is lower than previously thought. The stock was -6.3% at 51.06 pence at midday in London.

China is the world's manufacturing powerhouse. So a slowdown there is bound to have an impact on not just the Chinese economy but also the global one. And that indeed seems to be happening. China's manufacturing sector grew more slowly in February. This was gauged from official purchasing managers' index which dipped to 50.1 from 50.4. This suggests that the country's recovery could be slackening. As long as the reading stays above 50 it means that the sector has been growing. It is just that the pace of growth has slowed.

Growth in China's economy had picked up pace post the third quarter as lending and government spending surged. However, along with this, concerns re-emerged over inflation and possible bubble in property prices. This led the Chinese government to tighten monetary conditions, the impact of which was felt by the manufacturing sector as well. Of course, one will have to watch the performance of the sector for a few more months before any noticeable trend can be established. But China, like the rest of the emerging economies including India, has been feeling the heat of inflation. And measures to curb the latter are taking a toll on economic growth. 

Do you take economic growth projections by the IMF seriously? If you do then it would help to know that the global financier will slash the growth outlook for the US as well as for the whole world should there be an automatic spending cut in the former. In other words, if the US Government loses its right to keep spending more than what it earns, the US economic growth will be in danger of slowing down. And this slowdown in growth will also have repercussions on global growth as per the IMF. Consequently, it will have to take its growth projections lower.

We wonder what kind of economists are these who care only about the growth and not the quality of it. Clearly, the extra growth in the US that the IMF is talking about is due to more money spending by the Government and this was not sustainable in the first place. Thus, it should be happy that the deficit is being controlled which would pave the way for a healthier and sustainable growth in the long term. But alas, the IMF sorely misses the point. And sends out a misguided warning

There were several critical reform measures that the Budget remained silent upon. The FM was happy referring to them as works in progress! But one at least expected a timeline to be put in place for the implementation of two necessary legislations. These are the Direct Tax Code (DTC) and Goods and Services Tax (GST). Understandably the FM did not want to ruffle too many feathers in the pre-election Budget. He instead put the ball in the state governments' court to take the next step towards the reform. All he did was to provide a Central Sales Tax (CST) compensation of Rs 90 bn to the states.

The economic virtue of GST itself calls for accelerated implementation. More than 140 countries have introduced GST in some form. It has been a part of the tax landscape in Europe for the past 50 years. Moreover it is becoming the preferred form of indirect tax in the entire Asia Pacific region. As per government reports, replacement of indirect taxes by GST can potentially result in 1.4% increase in GDP growth . With such compelling logic, we are not sure why the Centre cannot expedite the legislation. Once again a 'safe' budget chose to ignore the economy's necessities!