Significance of the Tax Residency Certificate in India ( December 26, 2023 )
The Tax Residency Certificate is a proof of residency, and can ensure that income is not doubly taxed—that is, once in the source country and again in the resident country. The document’s importance also lies in the fact that it provides further credibility in the international transactions of the certificate-holder.
The Indian government has established various double taxation avoidance agreements (DTAAs) with different countries, and these treaty provisions are applicable exclusively to residents of countries that are parties to such agreements. Therefore, it is crucial to ascertain the individual’s tax residency. One significant document for establishing tax residency and supporting a claim for DTAA relief is a Tax Residency Certificate (TRC).
What is a tax residency certificate?
- A Tax Residency Certificate is an official document granted by a country’s tax authorities, confirming the residency status of the applicant, whether an individual or a company, for a specific tax year. This certificate serves as evidence that the applicant qualifies for the benefits outlined in the tax treaty framework of that particular country.
- For example, an Indian resident is obligated to pay taxes on their worldwide income in India. If they earn income from a foreign country, they might also face tax deductions in those countries. To potentially lower the foreign tax rate, they can leverage the advantages provided by a tax treaty established between the Government of India and other nations. To avail the benefits of the DTAA in a foreign country, the Indian taxpayer needs to acquire a TRC from the Indian Government.
In the case of a non-resident earning income from India, obtaining a TRC is necessary from their local government.