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India Scraps Plan to Tighten Tax Treaty Rules for Investors

India dumped a proposal to tighten rules for overseas investors seeking to benefit from double taxation treaties after money managers said the change was too onerous and foreign funds sold the most shares in a year.

The so-called tax residency certificate needed to claim benefits is “necessary but not sufficient,” according to the budget documents released yesterday, stoking investor concerns that tax treaty benefits will become harder to avail. The finance ministry said today the certificate will be accepted as proof and authorities won’t “go behind the TRC and question his resident status.”

Overseas and local companies often route investment into India through Mauritius-based firms because capital gains these firms make on Indian shares aren’t taxed in the Asian nation. Overseas funds sold a net $237 million of stocks yesterday, the most in almost a year, paring this year’s inflow to $8.23 billion, data from the regulator show.

“This removes all ambiguity,” Ketan Dalal, joint tax leader at PricewaterhouseCoopers LLP in Mumbai, said in an interview to Bloomberg TV India today. The proposed changes were “disturbing,” he had said yesterday.

Indian equities declined yesterday, with the benchmark stock index completing its first monthly drop in four months, on concern the nation’s budget lacks measures to curb expenditure that’s key to containing the fiscal gap.

The S&P BSE Sensex rallied after the finance ministry’s statement today, gaining 0.3 percent to 18,918.52 at the close in Mumbai.

The rule would have created ambiguity regarding the additional documents that will have to be produced to enjoy these benefits, Shefali Goradia, a partner at BMR Advisors, a Mumbai-based tax and deals advisory, said yesterday.

Bilateral treaties are meant to ensure that capital gains arising from sale of shares are taxed only in the investors’ country of residence and not where the company is based, thus avoiding the payment of taxes twice over.

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