Tax Residency Certificate for non-residents

Taxability of any income under the Indian Income tax Act, 1961 (‘the Act’) depends primarily on residential status of a person. For instance, a person considered as Resident and Ordinarily Resident under the Act is charged to tax on his worldwide income while a non-resident is taxed only on income arising in India.

There are certain criteria given in section 6 of the Act for various assesses to determine the residential status. For instance in case of individual, the residency depends on number of days stay in India, in case of companies, it depends on the country of incorporation or place of effective management etc.

Once the chargeability of a particular income is determined, one needs to find out the rate at which that particular income will be taxed. The rates of tax for non-residents in case of certain income streams like dividend (other than those chargeable to dividend distribution tax), interest, royalty and fees for technical services are given in section 115A of the Act. Also, the rates applicable for withholding tax are given in Part II of First Schedule of each Finance Act.

Apart from the above provisions, as per section 90 / 90A of the Act, a non-resident can also claim relief, if any, given in the Double Taxation Avoidance Agreement (‘DTAA’). DTAAs are bilateral agreements entered into between Governments of various countries so as to avoid the hardships of double taxation on the tax payers.

To illustrate this with a hypothetical example, lets say, Mr. A had studied Chartered Accountancy in India and had then shifted to the USA for further studies some years back. He now practices in USA and is a non-resident in India as per Indian Income tax Act. He has been approached by an Indian firm to provide consultancy and advisory services on certain laws prevalent in the USA. Mr. A, while in the USA, provided his consultancy services to the Indian firm. As per the Indian Income tax Act, the fees paid for such consultancy services are liable to be taxed in India under the term ‘consultancy service’ as provided under section 9(1)(vii). However, under the India-USA DTAA, the same will not be chargeable to tax in India relying on Article 15 of the DTAA. Mr. A can thus avail the benefit of DTAA.

Section 90 of the Act was amended vide Finance Act, 2012, to the effect that in order to claim any relief under the DTAAs, the non-resident will be required to furnish Tax Residency Certificate (‘TRC’) of the country of its residence.

In addition to TRC, the non-resident payee also needs to furnish Form 10F which is a self-declaration giving prescribed details.

Hence, in the above illustration, if Mr. A is able to obtain TRC from the US authorities, and present it to the Indian firm alongwith Form 10F and a declaration that he does not have any fixed base in India, he will not be taxed in India and there will be no withholding tax implications while remitting the money to USA.

Recently, however, the Ahmedabad bench of Income Tax Appellate Tribunal (‘ITAT’) in the case of Skaps Industries India Private Limited (ITA Nos. 478 and 479/Ahd/2018) has held that absence of TRC should not deny the assessee, the benefits of DTAA.

Nevertheless, one cannot underestimate the significance of TRC in Indian Income tax scenario. Specially, in the case of non-residents planning to return back to India in long term, it is prudent to obtain tax residency certificate for every financial year. This may help them in a situation where their assessment is reopened in any assessment year.

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