Are Benefits Under DTAA Being Withdrawn?

In the last issue I had mentioned about investing in bank deposits for enjoying income tax exemption.  A few days later there was a mail in my inbox from one of the readers asking if I could explain the logic of charging a higher tax deduction at source on amount placed in NRO deposits with banks.   To have the perspective right he had mentioned banks are deducting tax at source ( TDS )  at the rate of 10% plus applicable surcharge and cess  on deposits placed by residents as against 30 %  plus applicable surcharge and cess  deducted from  deposits placed in Non Resident Ordinary  ( NRO ) account  by non resident Indians.  He had concluded by saying that to his mind it appeared highly illogical and irrational.  In reply I wrote   that law might not always have logic.

Just two days later I received another query.  He had (for the sake of convenience let us call him Mr A )  had deposited Rs 2 lakh with a bank for  1 year. After 2 months he availed a loan of Rs 1.60 lakh against the deposit receipt for meeting some medical expenses. Mr A did not have the sufficient cash flow subsequently to get the loan against the deposit receipt ( LDR )  closed. So on the maturity date the loan was closed by adjustment against the deposit account. Mr A had gained interest of Rs 20,000 on his term deposits and was charged around Rs 15,000 on the LDR. Mr A was under the impression that as the net interest received by him was only Rs 5000 (20,000 – 15,000) TDS would not be deducted. But bank deducted Rs 2,000 as TDS at the rate of 10% on the interest paid.   Mr A wanted to know, what the bank had done was right or not.   In reply I confirmed that what the bank has done is right as per law.  Tax deduction at source  on bank deposits are  governed by the provisions of Section  194 A  of  the Income Tax Act and  Sec 194A does not provide for setting off  the  interest  charged  on LDR against the  interest  receivable on deposit account. Thus what the bank has done is right legally even though it might appear to be illogical to many of us. As said earlier law might not always have a logic.

Instead of arguing   and debating on the logic of various   provisions of law what would be more beneficial for us is to understand the   provisions that are beneficial to us and take advantage out of them.   One such provision that is beneficial to the non residents is the provision relating to Double Tax Avoidance Agreement ( DTAA ).   DTAA is a bilateral agreement entered into between India and another foreign country with the objective of avoiding taxation of the same income in two different countries.  The provisions of DTAA overrides the general provisions of the Income Tax Act .  As per the provisions of Income Tax Act 1961, TDS is applicable for interest paid on NRO deposits. (Interest income from NRE and FCNR (B) deposits is exempted from tax as per section 10 of the Income Tax Act, 1961. )  It is to be noted that TDS is applicable for interest paid on NRO deposits irrespective of the amount paid (i.e. the exemption up to Rs.10,000/- per annum as in the case of interest on domestic deposits is not applicable). Presently, the normal rate of TDS on interest payment to non-residents is 30% plus applicable surcharge and cess.

However  the  government has entered into DTAA with various contries and in case of  NRIs residing in  such  countries the rate of  TDS  would vary from 10% to 20% , based on the agreement.  The benefit of lower  deduction of TDS on interest payments is applicable only in the case of “non-residents”  as per Indian Tax laws.    Section 6 of the Income tax Act  sets out the criteria for an individual to be a resident and any one who does not fulfill the conditions would be deemend to be a non resident.  Accordingly an individual is a non-resident in India if he does not satisfy any of the following conditions Viz  Presence in India for at least 182 days during the financial year or  Presence in India for at least 60 days  during the financial year and 365 days or more during the four preceding financial years. In the case of an Indian citizen who leaves India for the purpose of employment or who comes on a visit to India during the financial year, 60 days will be substituted by 182 days. In order to deduct tax from interest on NRO deposits at the rates prescribed in DTAA, the payee must be a “non-resident” in India as per Indian tax laws and must be a “resident” of the other country as per the tax laws/rules of that particular country.

Banks have been  insisting on sufficient documentory evidences for the same. Every year  banks collect a declaration  from the non-resident to the effect   that he/she is not a resident in India as per the Income Tax laws applicable in India and that he/she is a resident of the other country as per the taxation rules and laws of that country for the respective year.  Certain banks have been insisting on copy of the visa stamped passport.   Might be because there was no uniformity in the documentory evidence collected by the banks Central Board Of Direct Taxes ( CBDT )  Vide  Notification  Dated  17th  September, 2012  has  amended  section 90 and 90A  of the Income Tax Act  with effect from    01st April,2013.   As per the amended sections of Income Tax Act 1961, a non resident  customer who is claiming the benefit of Double Taxation Avoidance Agreement (DTAA) shall not be entitled to claim such benefit any more, unless he produces a Tax Residency Certificate ( TRC )   in proof of his residence in any country outside India obtained from the government of that country.  CBDT has not prescribed any specific format for the certificate. However CBDT has prescribed following contents to be captured in the Tax Residency Certificate (TRC) on the basis of which DTAA can be extended Viz   Name of the assessee,    Status (individual, company, firm etc.) of the assessee,   Nationality (in case of individual),  Country or specified territory of incorporation or registration (in case of others),   Assessee’s tax identification number in the country or specified territory of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory,  Residential status for the purposes of tax,  Period for which the certificate is applicable and   Address of the applicant for the period for which the certificate is applicable. The TRC  has to be  duly verified by the Government of the country of which the NRO customer claims to be a resident for the purposes of tax.   Thus, for a  depositor who is a resident of UK , the TRC has to be issued by the UK  government.    If a customer fails to submit required TRC, he will not be able to claim benefit of DTAA henceforth.  Banks would be insisting on submission of  TRC  by the customers every year  for  claiming the benefit under DTAA.  Even though the relative notification has been issued by CBDT in September,2012  clarity  is yet to evolve on who would be the competent authority   in the foreign state for issuing the tax residency certificate.

And as I am just concluding my article I find  the  Union Budget 2013 presented by the Honourable Union Finance Minister  before the parliament  today   ( 28th February,2013 )   has added insult to injury as far as tax residency certificate is concerned.   The Union Budget 2013 proposes to  insert a new sub section ( sub section 5 ) to clause 90 and 90 A of the Income Tax Act stating that  tax residency certificate  shall be necessary  but not a sufficient condition for claiming any relief under   DTAA.  The amendment  has not specified any documents which would  be considered as  sufficient proof  for  proving the residential status of the depositor. Thus it results in merely  giving  more power to the assessing officer to be more  subjective in his judgement. Such subjectivities would  create fears, confusion  and lack of confidence in the minds of the depositors.  Instead of clarifying the ambiguities , the  proposed amendment creates  more ambiguities and uncertainties . The above amendment,  if passed by the parliament could open a plethora  of litigations  between the non  residents and the  income tax department.  This could affect  the investment  decisions  of non residents and also  inflow of NRO deposits.       When the country is  trying hard to plug the  current account deficit ,  can we not avoid such costly mistakes?  Representation will have to be made by appropriate forums for the same with all earnestness.  If  the proposed  amendment gets passed by the parliament , to my mind it appears that  it is equivalent to withdrawing DTAA benefits.  I would say what the law gives by one hand , the law takes back by the other hand.

Jiz P. Kottukappally. The author is working as Asst General Manager, Catholic Syrian Bank and the views expressed are the personal opinion of the author. Author can be reached at jizpauls@gmail.com