How to Obtain Tax Residency Certificate in India?

The levy of income tax under the Indian taxation system is based on residence rule, i.e., it levies tax on individuals based on their residential status as per the Income Tax Act, 1961 and different provisions are applicable depending on whether an individual or company is resident or non-resident as per the Income Tax Act (ITA), 1961.

Non-residents are taxable only on India-source income, i.e., the income that is earned or generated in the territory of India. Any income from royalties and Foreign Technical Services (FTS) bound to accrue or arise in India is taxable for non-residents in India. However, as per the ITA, non-residents can choose whether they want to be taxed under the ITA or the relevant Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial for them.

Double Taxation Avoidance Agreements (DTAA)/Tax Treaties

DTAA is an agreement between two countries aimed at helping individuals of one of such countries who has income from the other to avoid being taxed twice for the same transaction. Both individuals and entities can benefit from DTAAs and gain significant tax relief.

• Foreign investors can claim tax relief in their country for paying the necessary taxes in India. In addition, DTAA helps curb instances of tax evasion and make tax-related matters more transparent.
• This further means that residents of a country that has a DTAA with India can enjoy a lower tax rate.

This relief in taxes is often available in relation to the income on which the individual has already paid income tax in India or their home country. General agreements now exist with more than 130 countries such as the US, UK, Germany, Japan, France, Italy, Spain, China, Canada, Australia, Russia, Netherlands, Brazil, Hong Kong, etc. Besides this, limited agreements in relation to income of airlines/merchant shipping also exist with more than 15 countries.

• Most Favored Nation (MFN) clause: Some of India’s DTAAs have an MFN clause. This clause basically means that if India signs a DTAA with another country, which offers a lower tax rate on royalty and FTS, the residents of the other country shall be taxed at this lower tax rate.
• Benefits for Non-Residents: DTAAs and MFN clauses basically allow non-residents who are residents of a country that has an MFN with India to enjoy the benefits of a lower tax rate even if India does not have a DTAA with that country. This allows such countries to further discuss cooperation and conduct negotiations for even better tax rates for their residents in India.

Recent Amendment in Legal Provisions

In March 2023, the Indian Government amended Section 115A with the aim of aligning the tax rate on royalty and Foreign Technical Service (FTS) earnings with international standards. In addition, this move would also contribute to improving domestic investments and encouraging innovation.

The withholding tax rate on royalties and FTS paid to non-residents has been significantly increased by the Finance Act, 2023. As of now, the rate has been doubled from the original 10% to 20%, where the actual applicable rate was 10.92% and now stands at 21.84% after considering the applicable 5% surcharge and 4% education cess.

Position before Amendment

Not RequiredÈ

S. No.	Tax Treaty Rate	Domestic Rate	Beneficial	TRC & Form 10F	PAN	Annual Filing
1	10%	10.92%	Tax Treaty	Required	Required	Required
2	15%	10.92%	Domestic	Not Required	Not Required	Not Required
3	20%	10.92%	Domestic	Not Required	Not Required	Not Required
4	No Tax Treaty	10.92%	N.A.	Not Required	Not Required	Not Required

Position after Amendment

S. No.	Tax Treaty Rate	Domestic Rate	Beneficial	TRC & Form 10F	PAN	Annual Filing
1	10%	21.84%	Tax Treaty	Required	Required	Required
2	15%	21.84%	Tax Treaty	Required	Required	Required
3	20%	21.84%	Tax Treaty	Required	Required	Required
4	No Tax Treaty	21.84%	N.A.	Not Required	Not Required	Not Required

The tax rate depends on whether the individual or entity holds a Tax Residency Certificate (TRC) and Permanent Account Number (PAN). Besides, after 1 April 2023, non-residents are mandated to file their income tax returns (ITR) if they wish to claim the benefits of DTAAs.

What is the requirement for Tax Residency Certificate in India?

TRC Requirements for a Foreign Company/Entity

To claim benefits under the DTAA, a foreign company or non-resident is required to furnish a valid TRC issued by the government of its country of residence to the payee and Income Tax Department through Form 10F under the Income Tax Act 1961. Following is the procedure to obtain Form 10F:

• Obtain a valid PAN (Permanent Account Number) by making an application in form-49AA

The foreign or non-resident company is required to make an application for the allotment of the PAN under Section 139 of the Income Tax Act 1961 with the supporting documents such as:
    - Copy of the Registration Certificate (i.e., Incorporation Certificate) that has been issued in the country where the applicant is located. It must be duly apostilled.
    - Copy of Registration Certificate (i.e., Government ID or Tax ID that has the address of the foreign/non-resident entity). It must be duly apostilled.

• Once you have obtained a valid PAN, you must register on the e-filing portal (www.income.gov.in) using the details provided in the PAN.

• Apply electronically on the E-filing portal (www.income.gov.in) for Form-10F

The Tax Department of India has deemed it mandatory for foreign entities or non-residents to electronically file Form 10F on the e-filing portal. It must be accompanied by the valid TRC to avail DTAA benefits.

• e-filing can only be done after it is signed by an authorized signatory using a Digital Signature Certificate.
• Form 10F is basically a form of self-declaration form that has been completed by a foreign company/non-resident, who is generating income from India. These documents are maintained by the foreign company/non-resident and provided to the Indian tax authorities when required.

Details required in Form-10FA for a Foreign Company: Taxpayer’s status (individual, company, etc.). Taxpayer’s PAN. In case of an individual, nationality. In case of others, the country or specific territory where it was incorporated or registered. Tax Identification Number of the taxpayer. Duration for which residential status is valid. Taxpayer’s address in the country of residence.

TRC Requirements for an Indian Company/Entity

A company who is a resident in India under the Income Tax Act, 1961 is required to pay tax on its global incomes earned in India, based on residency rule. Some of such companies are also subject to taxation in the country in which they earn such income based on source rule. As such, in order to claim DTAA benefits, an Indian entity or resident individual must provide a valid Government issued TRC through Form 10FA under ITA.

• To obtain Form 10FA an applicant has to apply to the Assessing Officer electronically through the income tax portal (www.income.gov.in) for a Tax Residency Certificate in Form No. 10FA under rule 21AB.
• The Assessing Officer shall give the assessee a certificate of residency in Form No – 10FB upon receipt of an application and after being satisfied with the particulars mentioned therein.

Details required in Form-10FA for an Indian Company: Full Name & Address. Taxpayer’s status (company, individual, etc.). Nationality (in case of an individual)/country or specific territory where it was incorporated or registered (in the case of others). Validity of residential status. Taxpayer’s address for the duration for which TRC is needed. Email ID. PAN of the taxpayer. Purpose for obtaining TRC.

Role of TRC in Filing Income Tax Return

• Non-residents earning income from India are mandated to comply with the increased tax rates and file their ITRs from 1st April 2023.
• Non-residents must make sure they adhere to all the provisions of the ITA to avoid any legal issues/penalties.
• Indian entities that make payments to non-residents for royalties or technical services must make sure to timely and accurately deduct and deposit the tax amount as per the increased taxation rates.
• In case any non-resident or Indian entity fails to comply with relevant regulations, they may incur some penalties and legal repercussions. As such, it is strongly advised to adhere to all relevant regulations and file ITRs on time.
• The increased tax rates and compliance requirements might put some extra administrative burden on non-residents and Indian entities.

Conclusion

Considering there are severe repercussions for not complying with the prescribed procedure and regulations, it is imperative for applicants to ensure they adhere to all the relevant provisions pertaining to the process of obtaining a tax residency certificate in India. Besides, procuring a TRC also helps avail of certain tax benefits that are granted by the DTAAs India has with other countries.


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