Indian Union Budget - 2005, Union Budget - 2005, Budget

RBI Replies	23.11.2006

Anomalies in Mid-term Review of Annual Policy for 2006-07	04.11.2006
04/11/2006 The Governor, Reserve Bank of India, Mumbai. Respected Sir, Sub: Anomalies in Mid-term Review of Annual Policy for 2006-07. I take this opportunity to congratulate you for presenting once again a dynamic policy, which will give further fillip to the momentum of economic growth, while simultaneously reining the inflationary pressures. Sir, the marathon presentation will further encourage large and small entrepreneurs in their efforts for growth and development of their trade and industry, which in turn will boost the growth of the Nation. Sir, the highlights amongst others proposes two changes, namely : - Resident individuals would be free to remit up to US $ 50,000 per financial year as against the earlier limit of US $ 25,000 - - Lock-in period for sale proceeds of the immovable property credited to the NRO account to be eliminated, provided the amount being remitted in any financial year does not exceed US $ one million - Both the proposals mention / link the limits to a "calendar year", whereas the original regulations stipulated and have linked the limits to a "financial year" as reflected in part of copy posted herein. Possibly, the intention is to delink the limits to a "calendar year", and now link the same to a "financial year". But if it is not so, I suggest that appropriate provisions / changes be made linking the limits of US$ 50,000 and US$ 1 mn, respectively, to "calendar year". I once again take this opportunity to congratulate you and wish you the very best in all your endeavors for taking forward the economy and the Nation into a new era of progress and prosperity. With respectful regards, Sincerely, RAJESH H DHRUVA Chief Executive femaonline.com Cell : (0) 98240 98240 ==================================================================================== RESERVE BANK OF INDIA FOREIGN EXCHANGE DEPARTMENT CENTRAL OFFICE MUMBAI – 400 001 January 31, 2004 RBI/2004/36 A.P.(DIR Series) Circular No.62 To All Authorised Dealers in Foreign Exchange Madam / Sirs, Liberalised remittances facilities to NRIs/PIO and Foreign Nationals · Amendments to FEMA Regulations · Clarificatory Guidelines Attention of Authorised Dealers is invited to paragraph 4 of A.P.(DIR Series) Circular No.67 dated January 13, 2003, permitting them to allow remittances upto USD 1 million, per calendar year, out of balances held by NRIs/PIO/Foreign Nationals (including retired employees or non-resident widows of Indian citizens) in NRO accounts/sale proceeds of assets, on production of the following documents : ==================================================================================== RESERVE BANK OF INDIA FOREIGN EXCHANGE DEPARTMENT CENTRAL OFFICE MUMBAI – 400 001 February 4, 2004 RBI/ 2004/39 A.P. (DIR Series) Circular No. 64 To All Authorised Dealers in Foreign Exchange Madam/Sirs, Liberalised Remittance Scheme of USD 25,000 for Resident Individuals As you are aware, we have been closely monitoring the macro-economic developments of the country and initiating suitable policy changes in tune with the changing scenario. As a step towards further simplification and liberalization of the foreign exchange facilities available to residents, it has been decided that resident individuals may freely remit upto USD 25,000 per calendar year for any purpose for which a Scheme has been formulated as detailed below:
TDS anomalies regarding Long Term capital gains of NRIs.
6th March, 2006. Shri P. Chidambaram, Honorable Finance Minister, Ministry of Finance, New Delhi. Respected Shri P.Chidambaram, Sub: TDS anomalies regarding Long Term capital gains of NRIs. Good wishes and I take this opportunity to heartily congratulate you for presentation of a progressive and balanced budget, which will definitely enhance the pace of economic development and provide an opportunity to the rural population living in the farthest corner of India to take a better share of prosperity and opportunities widening for Indians. Sir, vide my letter dated 3rd January, 2005, I had forwarded submissions regarding TDS anomalies pertaining to Short Term capital gains of Equities and Equity Schemes and Long Term gains of Debt and Hybrid Schemes in case of Non Resident Indians. I sincerely thank you for implementing appropriate changes and providing for TDS @ 10% on income by way of Short Term capital gains of Equities and Equity Schemes by insertion of Sub-clause ( C ) being Clause 1 (b) (i) (C) of Part-II of THE FIRST SCHEDULE bringing the TDS rate at par with the 10% rate of Income Tax , which will definitely bring a sigh of relief to NRIs across the world. While the said amendment is being made , a simultaneous change suggested and necessary regarding Long Term capital gains arising from Debt and Hybrid Funds of Indian Mutual Funds being taxed at 10% but TDS being levied at 20% continues to be a part of the Statute as the same is covered by Clause 1 (b) (i) (D) of Part-II of THE FIRST SCHEDULE, which continues to represent the erstwhile Clause 1 (b) (i) (C) of the Finance Act, 2005. I once again request you to look into this aspect and provide for TDS @ 10% in case of Long Term capital gains arising out of Debt and Hybrid Schemes of Indian Mutual Funds in case of Non Residents as the rate of income-tax for such gains is prescribed at 10% vide First Proviso to Section 112 of the I.T.Act,1961. I am enclosing copy of relevant part of Section 112 of the Income Tax Act, 1961, which provides for tax at 10% and also relevant part of THE FIRST SCHEDULE of Finance Bill 2006, which provides for TDS at 20%. In case any clarifications are necessary, I shall be more than happy to provide appropriate assistance to the best of my ability. Thanking you in anticipation. Sincerely, RAJESH H DHRUVA Chief Executive nribanks.com Tel. No. : 0091 281 2464099 / 2463367 Cell : 0091 98240 49944 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ THE FIRST SCHEDULE (See section 2) PART II RATES FOR DEDUCTION OF TAX AT SOURCE IN CERTAIN CASES In every case in which under the provision of sections 193,194, 194A, 194B, 194BB, 194D, and 195 of the Income – Tax Act, tax is to be deducted at the rates in force, deduction shall be made from the income subject to the deduction at the following rates :- 1. In the case of a person other than a company – (b) where the person is not resident in India – (i) in the case of a non-resident Indian- (A) on any investment income 20 per cent; (B) on income by way of long-term capital gains referred to in section 115E 10 per cent; (C) on income by way of short-term capital gains referred to in section 111A 10 per cent; (D) on other income by way of long-term capital gains [not being log-term capital gains referred to in clauses (33), (36) and (38) of section 10] 20 per cent; (E) …. ………….. PROVISO TO SECTION 112 OF THE INCOME-TAX ACT, 1961 112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of —…… [(c) in the case of a non-resident (not being a company) or a foreign company,— (i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent ;] [Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities [or unit], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee. COPY OF LETTER /MAIL Dt. 3.01.2005 ----- Original Message ----- From: keynote@nribanks.com To: fm@finance.nic.in Sent: Monday, January 03, 2005 6:11 PM Subject: TDS Anomalies re: long-term and short-term capital gains of NRIs Shri P. Chidambaram,, Honourable Finance Minister, Ministry of Finance, New Delhi. Respected Shri P.Chidambaram, Sub : TDS Anomalies re: long-term and short-term capital gains of NRIs Good Wishes and wishing you a very happy year 2005. While presenting the tax proposals in the Union Budget 2004-05 as Hon. Finance Minister while recognizing the capital gain tax as a vexed issue , Sir , You have revamped the capital gain tax by granting total tax exemption to long-term capital gains from security transactions i.e. equity shares and equity schemes of Mutual Funds held for a period exceeding 12 months and short-term capital gains thereof at 10% stating that “ the new tax regime will be a win-win situation for all concerned." Unfortunately, Your encouraging initiatives are grossly defeated by anomalies in the provisions of Tax Deduction at Source ( TDS ) pertaining to these long-term and short-term capital gains being : .01 Anomaly of 30% TDS from short term gains of equity shares & equity oriented units being taxed at 10%. .02 Anomaly of 20% TDS from long term Debt & Hybrid funds being taxed at 10%. 2. The anomalies are detailed herein with remedial suggestions and unless corrective action is taken immediately, the NRIs will definitely be shaken off from investment in equities and equity , debt and hybrid schemes of Indian Mutual Funds. 3. Should you require any clarifications ? I will be more happy to provide assistance to the best of my ability. I once again request you to kindly look into the matter and if thought proper, request for appropriate corrections. Thanking you in anticipation. Sincerely, RAJESH H DHRUVA Chief Executive nribanks.com Tel. No. : 0091 281 2464099 / 2463367 Cell : 0091 98240 49944 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- I. ANOMALY OF 30% TDS FROM SHORT TERM GAINS OF EQUITY SHARES & EQUITY ORIENTED UNITS BEING TAXED AT 10 % -------------------------------------------------------------------------------------------------------------------------------------- 1.The Finance Act, 2004 has exempted Long Term Capital Gains [LTCGs] from Equity Shares and Units of Equity-Oriented Funds and .02 levied tax rate of 10% in case of Short Term Capital Gains [STCGs], arising out of Equity Shares and Units of Equity-Oriented Funds i.e. gains from units held for a period 12 months or less. 1.2 Accordingly, Equity and Units of Equity-oriented Funds are taxed as under – .01 - 0% tax, in case of Long Term Capital Gains [LTCGs] .02 - 10% tax in case of Short Term Capital Gains [STCGs]. 2. The Provisions relating to Tax Deducted at Source [TDS] in case of a person "Not Resident in India" lays down - .01 - 0% TDS from LTCGs & .02 - 30% TDS in case of STCGs - not specifically provided – hence covered by residual clause – "whole of the other income" [ paragraph 1(b) (i) (G) of PART II OF FINANCE ACT, 2004 – Annexure-I ] 3. THEREFORE, in case of "Non-Resident", although tax payable on STCGs arising out of Equity Shares and Units of Equity-oriented Funds is 10%. .02 Tax is to be deducted at 30%. 4. This seems to be a drafting anomaly as the intention of the Statute is to levy tax at 10% only. 5. This will also create serious hardships for Non-Residents, as this will require filing of Tax Return to claim the refund of excess tax deduction of 20%, i.e. 30% TDS - 10% tax payable. 6. REMEDIAL SUGGESTION: A Clause should be inserted in Part-II of THE FIRST SCHEDULE of ensuing Finance Act, prescribing the rate of TDS at 10% in case of STCGs on assets referred to in Section 10(38) in case of "a person not Resident in India". II. ANOMALY OF 20% TDS FROM LONG TERM DEBT & HYBRID FUNDS BEING TAXED AT 10% -------------------------------------------------------------------------------------------------------------------------------------- Similarly, LTCGs arising from Units of Unit Trust of India or Units of Mutual Funds, other than Units of Equity-oriented Funds are taxed at the rate of 10% by virtue of Section 112 of Income-tax Act, 1961. [ Proviso to Section 112 of the Income Tax Act, 1961 – Annexure-II ] 2. However, provisions of Tax Deduction at Source (TDS) require deduction of tax at the rate of 20% as provided in paragraph-1 (b) (i) (C) of Part II of the Finance Act, 2004. [ paragraph 1(b) (i) (C) of PART II OF FINANCE ACT, 2004 – Annexure-III ] 3. Such deduction is prescribed year after year by relevant Finance Act and continues to be at 20% since many years. 4. ANOMALY : THEREFORE, whereas LTCGs of Debt Schemes and Hybrid Schemes of units, i.e. Schemes other than Equity-oriented Funds are to be taxed at 10%, .02 The tax deduction is prescribed at 20%. 5. This seems to be a drafting anomaly as the intention of the Statute is to levy tax at 10% only. 6. REMEDIAL SUGGESTION : A Clause should be inserted in paragraph 1 (b) (i) of Part-II of THE FIRST SCHEDULE of ensuing Finance Act prescribing the rate of TDS at 10% in case of LTCGs arising out of listed Securities, Units of Unit Trust of India and Units of Mutual Funds. ANNEXURE-I : paragraph 1(b) (i) (G) of PART II OF FINANCE ACT, 2004 Part II Rates for deduction of tax at source in certain cases 1. In the case of a person other than a company— (b) where the person is not resident in India— (i) in the case of a non-resident Indian— G) on the whole of the other income 30 per cent ANNEXURE-II : PROVISO TO SECTION 112 OF THE INCOME-TAX ACT, 1961 112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of —…… [(c) in the case of a non-resident (not being a company) or a foreign company,— (i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent ;] [Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities [or unit], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee. [Explanation.—For the purposes of this sub-section,— (a) “listed securities” means the securities— (i) as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (32 of 1956); and (ii) listed in any recognised stock exchange in India; (b) “unit” shall have the meaning assigned to it in clause (b) of Explanation to section 115AB.] ANNEXURE-III : PARAGRAPH1(b) (i) (C) OF PART II OF FINANCE ACT, 2004 Part II Rates for deduction of tax at source in certain cases 1. In the case of a person other than a company— (b) where the person is not resident in India— (i) in the case of a non-resident Indian— (C) on other income by way of long-term capital gains [not being long-term capital gains referred to in clauses (33), (36) and (38) of section 10] 20 per cent

" NRE / FCNR interest not Tax Exempt ! "

6th Feb. '06

Shri P. Chidambaram,,
Honorable Finance Minister,
Ministry of Finance,
New Delhi.

Respected Shri P.Chidambaram,

Sub : Anomalies re: tax exemption of NRE & FCNR accounts of NRIs.

Good Wishes and wishing you a very happy year 2006.

While critically examining the provisions of Section 10(4)(ii) of the Income Tax Act, 1961 , whereby income-tax exemption is granted to Non Resident Indians on interest earned on moneys in a Non-Resident ( External ) Account and Foreign Currency Non Resident ( FCNR ) deposits held in any bank in India , serious anomalies are noticed in the Income-Tax Provisions and Foreign Exchange Regulations.

Said anomalies defeat the intention of the Statute and result in tax exemption not being available to NRIs on the interest earned on NRE and FCNR accounts since 1st day of June, 2000 , when Foreign Exchange Management Act , 1999 (FEMA) replaced the earst-while law of Foreign Exchange Regulations Act, 1973 (FERA)The same are detailed herein

The anomalies are detailed herein with remedial suggestions . If any clarifications are needed , I will be happy to provide assistance to the best of my ability.

I once again request you to kindly look into the matter and if thought proper, request for appropriate corrections.

Thanking you in anticipation.

Sincerely,

RAJESH H DHRUVA

Chief Executive

nribanks.com

Tel. No. : 0091 281 2464099 / 2463367

Cell : 0091 98240 49944
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NRE / FCNR interest not Tax Exempt !
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1. Interest on Non Resident External ( NRE ) and Foreign Currency Non Resident ( FCNR ) deposits is exempt from Income Tax in India.

2. Said exemption is granted vide provisions of Section 10(4) (ii) of the Income Tax Act Act, 1961 ( I.T. Act ) [ Annex. 1 ]

3. Said section states as under :

" In the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 ( 46 of 1973 ) and the rules made thereunder :

Provided that such individual is a person resident outside India as defined in clause (q) of Section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account " .

4. Now, a critical study of the section shows that the exemption is granted as regards interest on moneys in NRE A/c in India in accordance with Foreign Exchange Regulation Act, 1973 ( FERA ) and rules made thereon.
.02 The Foreign Exchange Regulation Act, 1973 is repelled and has been replaced by Foreign Exchange Management Act, 1999 ( FEMA ) with effect from 1st June 2000.

5. THUS, since 1st June 2000, Non Resident External A/cs are maintained and governed by the provisions of Schedule-1 of Foreign Exchange Management ( Deposit ) Regulations, 2000 and
Foreign Currency Non Resident A/cs are maintained and governed by the provisions of Schedule-2 of Foreign Exchange Management ( Deposit ) Regulations, 2000.[ Annex. 2 ]

6. AS SUCH, presently NRE and FCNR A/cs are not maintained under FERA 1973 but are maintained under the Foreign Exchange Management Act, 1999 ( FEMA ) and further governed by Foreign Exchange Management ( Deposit ) Regulations, 2000.

7. WHEREAS , the exemption under Section 10(4)(ii) continues to exempt interest earned on NRE A/c maintained in accordance with FERA 1973.

8. HENCE it can be concluded that NRE A/cs not being maintained under FERA 1973 and further more as the tax exemption under Section10(4) (ii) is granted / related to NRE A/cs maintained under FERA 1973, it is imperative that interest earned on NRE and FCNR A/cs maintained under Foreign Exchange Management ( Deposit ) Regulations, 2000 is not exempt vide provisions of Section 10(4) (ii) of I.T. Act.

9. CONCLUSION : It can therefore be concluded that , presently , interest earned on NRE and FCNR A/cs maintained under Foreign Exchange Management ( Deposit ) Regulations, 2000 is liable to tax and not exempt income.

10. REMEDIAL SUGGESTIONS :

.01 Section 10(4)(ii) should be appropriately amended. The exemption should be linked to Non Resident External and Foreign Currency Non Resident A/cs maintained under the regulations Foreign Exchange Management Act, 1999.

.02 Such amendment should be made retrospectively , giving effect to the changes since 1st day of June, 2000.

II. MOREOVER , the exemption is granted to an individual who is determined as and covered by the definition of an NRI , i.e. ' a person residing outside India ' as per the provisions of FERA, 1973 as is evident from the language of the Proviso to Section 10(4)(ii) herein :
"Provided that such individual is a person resident outside India as defined in clause (q) of section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account;]
Appropriate changes should be made herein too in context of FERA being replaced by FEMA.

ANNEXURE-III : PARAGRAPH1(b) (i) (C) OF PART II OF FINANCE ACT, 2004