The finance ministry on Friday clarified concerns regarding announcement on tax residency certificates in the Union Budget.
"In the case of Mauritius, circular no. 789 dated 13.4.2000 continues to be in force, pending ongoing discussions between India and Mauritius. However, since a concern has been expressed about the language of sub-section (5) of section 90, this concern will be addressed suitably when the Finance Bill is taken up for consideration," a circular from the ministry of finance said.
Markets reacted positively to the clarification, with the BSE Sensex rising nearly 70 points and the Nifty gaining 27 points.
"Investors from Mauritius should not worry," Ketan Dalal, a joint tax leader at PwC India said after the ministry's clarification.
The Budget proposal stated a tax residency certificate "shall be necessary but not a sufficient condition" to take advantage of double taxation avoidance agreements".
There are concerns that the new announcements will impact all non-resident investors and FIIs as they fear disqualification from taking advantage of Double Taxation Avoidance Agreements (DTAA).
India currently has DTAA agreements with 84 countries including Mauritius and a majority of FIIs use these agreements to save on taxes for their India investments.
Tax authorities had previously considered this tax residency as enough proof to allow foreign investors registered in countries with these treaties to avoid paying taxes in India.
On Thursday, Mr Chidambaram addressed these concerns at a news conference, saying the amendment had sought to clarify that tax authorities would now look at not only the tax residency requirement, but also enforce rules mandating these foreign investors are the beneficiaries of any investments under double tax agreements.
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