Tax Residency Certificate

India taxes capital gains on a source basis: money made in India is taxable in India, whoever made it. A Double Taxation Avoidance Agreement can override that, which is why offshore capital reaches Indian Category III AIFs through Mauritius, Singapore and the Netherlands rather than directly.

But a treaty is not self-executing. To claim its benefit, the non-resident investor must produce a Tax Residency Certificate issued by the tax authority of the treaty country, proving it is resident there. Without a TRC — or where India has no DTAA with the investor's country — the income is taxed under the ordinary provisions of the Income Tax Act, and the treaty rate is simply unavailable.

The TRC is the primary document. Where it does not itself contain all the prescribed particulars, CBDT's notification of 1 August 2013 requires the missing information to be furnished in Form No. 10F. The two travel together.

What a TRC buys has narrowed considerably:

• Mauritius. The DTAA once exempted Mauritian residents from Indian tax on gains from selling shares of an Indian company. The Protocol of 10 May 2016 gave India a source-based right to tax those gains, with grandfathering for investments made up to 31 March 2017 — shares acquired before that date remain outside Indian capital gains tax however late they are sold. The change is limited to shares; debentures keep their treaty benefit, and interest income enjoys a withholding rate of 7.5%.
• Singapore. A protocol of 30 December 2016 made the same shift, from residence-based to source-based taxation of gains on Indian shares. Treaty withholding on interest: 15%.
• Netherlands. Gains of a Dutch resident on selling Indian shares to a non-resident buyer are not taxable in India — but they are taxable if the Dutch resident holds more than 10% of the Indian company and sells to Indian residents. Treaty withholding on interest: 10%.

On top of all of this sits the OECD's Multilateral Instrument (MLI) and its principal purpose test: treaty benefits can be denied where obtaining them was a principal purpose of the arrangement. A TRC establishes residence; it does not establish substance.

A Category III AIF holds rupee-denominated debentures and pays Rs 10 crore of interest in a year to a non-resident investor. Same income, three jurisdictions, one document:

The Mauritius route saves Rs 75 lakh against Singapore on a single year's interest — 0.75% of the principal, every year, on the strength of one certificate.

Now the grandfathering. The same investor holds two blocks of shares in an Indian company:

• Block A, acquired March 2017 for Rs 20 crore, sold today for Rs 50 crore. Gain Rs 30 crore — acquired before 1 April 2017, so grandfathered: no Indian capital gains tax.
• Block B, acquired June 2018 for Rs 20 crore, sold today for Rs 50 crore. Gain Rs 30 crore — post-Protocol, so India taxes it at the applicable domestic rate.

Two identical Rs 30 crore gains in the same portfolio, taxed completely differently, on the strength of a date fifteen months apart.

Chapter 9 (Taxation), section 9.8 (Tax impact on performance of a Category III AIF) covers jurisdiction choice, DTAAs and the TRC. Expect: what a non-resident must obtain to claim DTAA benefit (a TRC from the foreign tax authority); which form supplies missing particulars (Form 10F, per the CBDT notification of 1 August 2013); the Mauritius Protocol date and the grandfathering cut-off (10 May 2016 and 31 March 2017); and the comparative interest withholding rates — 7.5% Mauritius, 10% Netherlands, 15% Singapore — which are stated as figures and asked as figures.

• A TRC is issued by the foreign tax authority, not by the Indian authorities and not by the AIF. The fund only collects it.
• Form 10F supplements the TRC; it does not replace it. It is required only where the prescribed information is absent from the certificate itself.
• Mauritius grandfathering is dated by acquisition, not by sale. Investments made up to 31 March 2017 are protected whenever they are sold.
• The Mauritius change covers shares only. Debentures keep their treaty treatment and the 7.5% interest rate — the workbook makes the point explicitly.
• The Netherlands exemption is conditional on the buyer and the stake. More than 10% held, sold to Indian residents, and the gain is taxable in India.
• A TRC does not defeat the principal purpose test. Under the MLI, treaty benefits can still be denied where the arrangement was set up mainly to obtain them.