Most Indian professionals live in India, work in India and earn in India. Thus they pay income tax to the Government of India through the processes set by the Income Tax Department. Many Indians have moved out of India and work in a foreign country. Their earnings are taxed by the Government of the country where they work and reside. If they have no income earned in India, there is no tax liability in India.
Some Indians have work or business in India and foreign countries. They may also have other forms of earnings in both countries. This double taxation becomes a heavy burden on the individual. The Tax Residency Certificate (TRC) is a tool to protect the individual from the possibility of double taxation.
Did You Know? India has an Agreement with 94 countries where Indians working can protect themselves from double taxation.
What Is a Tax Residency Certificate?
Tax Residency Certificates are issued by the Income Tax Department to Indian Residents earning from countries where India has a double taxation avoidance agreement. It is submitted to the payer so foreign entities might pass on an advantage under DTAA to Indian Residents.
Overview: Tax Residency Certificate
The Tax Residency Certificate (TRC) is issued by the Income Tax Department, and Government of India, to Indian Residents and Non Residents.
Purpose: Tax Residency Certificate
The purpose of the Tax Residency Certificate is to confirm the residence status of an individual or firm so that double taxation is avoided.
DTAA – What It Is?
DTAA stands for Double Taxation Avoidance Agreement. It is an agreement between two countries which agree on modalities to ensure that any income earned by an individual or firm is taxed only once. India has entered into such an agreement with a large number of countries.
Also Read: Step-by-Step Guide for E-Verifying Your Income Tax Return
Why TRC?
The Tax Residency Certificate is a document that establishes the residency of an individual or firm for purposes of taxation. The Certificate is recognized by all countries that have entered into a DTAA, making it easier for taxpayers and Governments to process taxes.
Who needs a TRC?
Any individual or firm who has income in their place of residence, as well as their home country, will thus have two sources of income. The taxpayer must file a return declaring the total income received from all sources. Without a system acceptable to any Government, the taxpayer will end up paying income tax in each country. Equipped with a Tax Residency Certificate issued by the resident country, the taxpayer can avoid double taxation.
What are the Laws Governing TRC?
Sections 90 and 90A of the Income Tax Act, 1961 empower the Government of India to enter into appropriate agreements with any other country or entity to protect taxpayers from double taxation.
Section 6 of the Income Tax Act 1961 governs all the clauses, rules and procedures relating to Tax Residency Certificate matters.
Who is an Indian Resident?
A paraphrased extract from Section 6 of the Indian Income Tax Act defines a Resident as follows:
An individual is said to be resident in India in any previous year if he is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more or has been in India for a cumulative period of three hundred and sixty-five days during the preceding four years out of which he has been in India for at least 60 days in the current year.
A company is said to be a resident in India in any previous year if it is a registered Indian company or It is mainly and effectively being managed from India. For this purpose, effective management implies that all key decisions of the company are taken in India.
Also Read: Depreciation Under Income Tax Act
What are the Steps In Getting a TRC?
Though a crucial document, obtaining a Tax Residency Certificate is fairly simple and clear.
First Step:
Identify the Appraising Office to whom you need to make the application. This can be obtained by searching your PAN and Registered Mobile Number from the Income Tax Department’s website. This is a one-time effort. It will remain the same as long as your residence or registered office stays within the jurisdiction of this office.
Second Step:
As an individual, you must prepare a clear document detailing your movements in and out of India during the year and the preceding four years. This should clearly show, with dates, the number of days you were in India and the number of days you were out of India. Your proof of travel and stampings on the passport are documents that the Appraising Officer will look for.
Third Step:
Download Form 10FA. Fill it. Along with the above document, please submit it to the Appraising Officer. This submission can only be made manually; no online facility is available.
Fourth Step:
The Assessing Officer will scrutinize the application and the documents. Suppose there are any queries or clarifications required. In that case, the Assessing Officer can send a notice asking the applicant to visit to clarify or produce more documents that the Assessing Officer may want. If the Assessing Officer is fully satisfied with the application, the Tax Residency Certificate will be issued in Form 10FB.
Also Read: All You Need To Know About Section 143(1) of Income Tax Act
Advantages of having a TRC
The Tax Residency Certificate offers several benefits to the taxpayer.
- By providing a Tax Residency Certificate, the taxpayer can avoid being taxed twice in each country.
- If a Tax Residency Certificate is available, tax deduction at source will be lower.
- One does not have to be a citizen of India to obtain a Tax Residency Certificate from India. The mere residential status will be sufficient.
- With Tax Residency Certificate, withholding Tax is lower. This is very relevant in cases of incomes like Royalties, Interest, Fees towards Technical Services, Consultancy Fees and Transfer of Capital Assets.
What are the Types of Income where TRC can be used?
The Tax Residency Certificate can prevent double taxation in various kinds of income. They are:
- Income from services rendered in a foreign country
- Income received a salary in a foreign country
- Assets owned in a foreign country
- Capital gains on assets transferred to a foreign country
- Interest on Fixed Deposits in a foreign country
- Interest on Saving Bank accounts in a foreign country.
Types of Agreements Between Countries
There are several types of Agreements between the Government of India and other countries. These are:
Double Taxation Avoidance Agreement
This is the most comprehensive agreement to protect taxpayers. This is entered into between the Government of India and the other country. 94 countries have signed the DTAA agreement and recognize the Tax Residency Certificate for this purpose.
Limited Agreements
This is an agreement between the Government of India and another country for a limited and specified purpose. The agreement provides double taxation relief to the income of merchant shipping and airline companies employees. India has such an agreement with the following eight countries:
- Afghanistan
- Ethiopia
- Iran
- Lebanon
- Maldives
- Pakistan
- People's Democratic Republic of Yemen
- Yemen Arab Republic
TIEAs
TIEA is an acronym for Tax Information Exchange Agreement. As the name implies, this helps countries to share information on tax matters with each other. India has entered into a TIEA with 21 countries.
SSAs
SSA refers to the Social Security Agreement. This pertains to an agreement with the Government of India and another country where there are cases of cross-border relocation and social security implications. India has agreements with 20 countries for SSA.
Also Read: What is Section 234C - Learn about Interest Imposed by the Income Tax Department
DTAA Countries
Following is the list of DTAA Countries:
- Albania
- Armenia
- Australia
- Austria
- Bangladesh
- Belarus
- Belgium
- Bhutan
- Botswana
- Brazil
- Bulgaria
- Canada
- China, People's Republic of
- Colombia
- Croatia
- Cyprus
- Czech Republic
- Denmark
- Egypt
- Estonia
- Ethiopia
- Fiji
- Finland
- France
- Georgia
- Germany
- Greece
- Hong Kong
- Hungary
- Iceland
- Indonesia
- Ireland
- Israel
- Italy
- Japan
- Jordan
- Kazakhstan
- Kenya
- Korea
- Kuwait
- Kyrgyzstan
- Latvia
- Libya
- Lithuania
- Luxembourg
- Macedonia
- Malaysia
- Malta
- Mauritius
- Mexico
- Mongolia
- Montenegro
- Morocco
- Mozambique
- Myanmar
- Namibia
- Nepal
- Netherlands
- New Zealand
- Norway
- Oman
- Philippines
- Poland
- Portugal
- Qatar
- Romania
- Russian Federation
- Saudi Arabia
- Serbia
- Singapore
- Slovak Republic
- Slovenia
- South Africa
- Spain
- Sri Lanka
- Sudan
- Sweden
- Switzerland
- Syria
- Tajikistan
- Tanzania
- Thailand
- Trinidad and Tobago
- Turkey
- Turkmenistan
- Uganda
- Ukraine
- United Arab Emirates
- United Kingdom
- United States
- Uruguay
- Uzbekistan
- Vietnam
- Zambia
Conclusion
As we can see, the Tax Residency Certificate is a very important protection from double taxation. It is a great relief to millions of NRIs and Resident Indians who have incomes from multiple countries. With increasing globalization and the dilution of business borders, the number of beneficiaries of this Certificate will multiply. Understanding its significance and benefits is a must for every taxpayer in the country.
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