NRIs & Foreign Firms Alert Income Tax Dept Targets Treaty Shopping
Focus Keyphrase: treaty shopping crackdown
The Indian Income Tax Department has tightened its scrutiny on treaty shopping. In May 2025, notices were sent to several NRIs and foreign companies operating from tax havens, questioning the legitimacy of their tax treaty claims.
Let’s simplify what this means and why it matters for Indian taxpayers, consultants, and international investors.
What is Treaty Shopping?
Treaty shopping refers to the practice where entities route investments or income through a third country solely to take advantage of favourable tax treaty provisions.
✅ Example: A company based in a high-tax country may set up a shell company in Mauritius to benefit from the India-Mauritius tax treaty (like zero capital gains tax).
Why is the Income Tax Dept Cracking Down?
The government is taking action based on:
- Increased misuse of DTAA (Double Taxation Avoidance Agreements)
- Shell companies claiming treaty benefits without real economic activity
- BEPS (Base Erosion and Profit Shifting) concerns flagged by OECD
This crackdown aligns with the General Anti-Avoidance Rule (GAAR) provisions in the Income-tax Act, 1961, and recent Supreme Court and High Court rulings supporting substance-over-form principles.
Recent Developments: Notices Sent in 2025
As per official sources:
- Over 150 notices have been sent to foreign firms and NRIs
- Many are operating from tax-friendly jurisdictions like Mauritius, Singapore, and UAE
- They’ve been asked to prove genuine business substance and economic presence
These cases are being evaluated under:
- Section 90(4) & 90(5) – Requiring Tax Residency Certificates (TRC) and prescribed information
- GAAR (Chapter X-A) – Allows IT Dept to disregard treaty benefits if arrangements lack commercial substance
How NRIs & Foreign Investors Can Stay Compliant
To avoid litigation or denial of tax treaty benefits:
✔ Ensure your Tax Residency Certificate (TRC) is valid and updated
✔ Maintain substance – have genuine employees, office space, bank accounts, and business activity in treaty country
✔ Avoid round-tripping or paper-layered structures
✔ Disclose foreign investments in Schedule FA of ITR accurately
✔ Consult with a tax advisor before claiming benefits under any DTAA
Key Legal References
| Provision | Relevance |
|---|---|
| Section 90(4) | Requires TRC from foreign taxpayer to claim DTAA benefit |
| Section 90(5) | Mandates additional info in Form 10F for DTAA claim |
| GAAR (Chapter X-A) | Allows ITD to deny tax benefits for impermissible avoidance |
| SC Ruling – Azadi Bachao Andolan (2003) | Initially upheld treaty shopping unless GAAR applies |
| CBDT Circular No. 789/2000 | Now superseded in substance by GAAR |
Expert Tip: Go Beyond Paper Residency
“Having a TRC is not enough anymore. You need economic presence – staff, control, decision-making – not just an address on paper.”
– Amit Taneja, International Tax Advisor
Related Blog:
🔗 DTAA Explained: Benefits, Risks & Compliance Guide for NRIs
Summary (Snippet Style – 48 words)
The Income Tax Dept is cracking down on treaty shopping by NRIs and foreign firms using tax havens. \ Entities must now prove economic substance—not just residency—when claiming DTAA benefits with India.
FAQ on Treaty Shopping Crackdown
Q1: Can a TRC alone protect me from tax scrutiny?
No. You must also prove genuine business operations in that country.
Q2: What countries are under scrutiny?
Mostly Mauritius, Singapore, UAE, Netherlands – all popular DTAA routes.
Q3: Does GAAR override tax treaties?
Yes, if the arrangement is deemed impermissible or lacks commercial substance.
Final Thoughts
If you’re an NRI or foreign entity claiming DTAA benefits, this crackdown is your wake-up call. The focus has shifted from paper compliance to economic reality. Efiletax can help you assess your structure and ensure you’re on the right side of tax law.