PREAMBLE
1.
NRI’s have always played a pivotal role and contributed to the
economic development of India and invariably supported the
Government in times of economic crisis, be it the worst forex
reserve crisis in 1992 when SBI's India Development Bonds were
well subscribed by NRIs or year 1998 when NRIs
contributed app. $ 4.5 bn. in SBI’s Resurgent India Bonds or
year 2000 when although USA NRIs were not eligible to
participate, the NRIs elsewhere subscribed a mighty sum of app.
$ 5.5 bn. in less than 3 weeks time in the issue of India
Millennium Deposits.
Even during the previous year, inspite of interest rates on NRE
deposit being drastically reduced by RBI from average of 6.50%
per annum to app. 2.25% per annum and Foreign currency
deposit rates for a long time been at par with LIBOR, NRIs have
added US$ 8.01 bn to the Forex reserves of the nation.
2.
Since the inception of liberalisation process in 91-92 initiated
by Hon’ble Prime Minister
Dr. Manmohan Singh, the Government on its part, also has
been appreciative of the role of NRIs and encouraged NRI
investments in India, as reflected in various incentives
offered to NRIs and policies initiated time and again as also
reflected in Hon'ble Prime Minister's speech as the then Finance
Minister while presenting the Union Budget for 1991-92 :
" A comprehensive review of policies and procedures bearing
on Non – Resident Indian investments shall be carried out and
further relaxations made in order to remove all procedural
difficulties and impediments to the setting up of industrial and
other ventures by Non- Resident Indians."( Para 18 ).
3.
Now, Finance Bill 2004-05, with effect from 1st September '04,
proposes taxation in case of :
(A) Non-Resident Indian's income being :
.01 Interest income
from NRE deposit [Sec. 10(4)(ii) ]
.02 Interest income
from FCNR deposit [Sec. 10(4) (ii) r.t.w. Sec.10(15)(iv)(fa)]
and
(B) Returnee Non-Resident
Indian's income being :
.01 Interest income
of continued FCNR deposit [Sec.10 (15)(iv)(fa)]
.02 Interest income
of RFC accounts [Sec. 10(15)(iv)(fa)]
MEMORANDUM
& REQUEST TO RECONSIDER TAX PROPOSALS :
1.
TAX EXEMPTIONS BE CONTINUED :
.01 Interest earned by NRIs on NRE and FCNR deposits are
granted tax exemptions since 1.4.1964 and all the investment
schemes offered to NRIs thereafter, being NRNR deposits, State
Bank of India's India Development Bonds, Resurgent India
Bonds and India Millennium Deposits were all granted total tax
exemption in India.
.02
Said tax proposals originally mooted by Vijay Mathur's Committee
in year 2002 were not implemented after thoughtful consideration
of representations of NRIs across the globe.
.03
In many countries including advanced countries like United
Kingdom, non-residents per se are not taxed on their
investment income. In USA too, in case of Non Resident,
Non–Citizen's Interest Income, Long Term Capital Gains and
Short Term Capital Gains are exempt from tax.
.04
As a matter of fact,
tax exemption is an incentive for NRIs in Middle -East and many
other countries to maintain their deposits in India. As
otherwise, now, the interest rates offered by banks in India
being at par or less than the rates offered abroad the NRIs will
not have any incentive / advantage of placing said deposits in
India.
2.
NRIs AT DISADVANTAGE OF LOWER INTEREST RATES :
.01.
Banks in India offer interest rates to residents in the
range of 6% to 7% p.a. for 1 year term deposits.
.02.
Against this on account of Reserve Bank of India’s directives
, NRE rupee deposits are offered lower interest rate of 2.50% to
3.75% p.a. at par with LIBOR/SWAP whereas FCNR US$ deposits are
offered interest of 2% to 3.40% p.a. for 1 to 3 years deposits.
.03
As such, the NRE rupee interest rates do not cover
average rate of inflation in the range of 5% and in effect NRE
deposits erode capital invested by NRIs.
.04
In view of this artificial cap on interest rates of NRE and FCNR
deposits pegging the interest rates at a lower level and in
disparity to interest rates offered to resident Indians, NRIs
deposits should be allowed to be tax-free.
3.
PROSPECTIVE TAX - A PRE-REQUISITE FOR EQUITY & JUSTICE :
.01 If the Government thinks it proper not to continue the
tax-exemptions and wishes to implement the tax proposals the
same should be levied on deposits placed upon enactment of said
tax provisions.
.02 The NRE and FCNR deposits have been placed by NRIs on a
crystal- clear assurance and understanding that the interest
earned is exempt from tax in India and the principal and
interest are fully repatriable.
.03
Any unilateral and retrospective change in said terms and
conditions is morally and legally incorrect and detrimental to
the high standards of equity and justice promoted by
Government of India.
.04
An abrupt deletion of tax-exemptions will not only shake the
confidence of NRIs at large but also be a major disincentive for
future NRI investments in India.
.05
Therefore all existing NRE and FCNR deposits should be granted
tax exemption till maturity.
.06 Tax exemption till maturity should also be granted on
the grounds of continued tax-exemptions granted by the
Government to NRIs on interest income arising out of existing
investments in India Millennium Deposits and Non-Resident
Non-Repatriable deposits ( NRNR ) till maturity.
4.
TAX OF Rs. 610 Crs. ONLY :
.01
As per Reserve Bank of India, NRI FC (BE & O) deposits
as on 31.3.2004 amounted to Rs.1,35,422 crores, mainly
comprising of Rupee and US$ deposits.
.02
Presently Banks offer interest rates in average of 2.50% to
3.73% per annum on Rupee deposits and 2.00% to 3.30% per annum
on US$ deposits.
.03
Thus total payment of interest comes to app. Rs.4,065 crores at
an av. interest rate of 3% per annum.
.04
Double Tax Treaties ( DTAA ) with the countries, which account
for more than 90% of NRI deposits attract withholding tax at 10%
to 15% on interest payable to non-residents.
.05
Therefore Tax collection at higher rateof 15% amounts to
Rs.610 crs. on interest estimated at Rs.4,065 crs.
.06
Tax proposed from NRIs estimated at Rs.610 crores is not only a
small amount vis-a-vis the principal amount of deposits placed
by NRIs of say Rs.1,35,422 crores, but also comprises a very
small portion of Direct tax collection totaling to Rs.1,39,365
crs. comprising of Rs.50,929 crs. of Income Tax and Rs.88,436
crs. of Corporate Tax proposed to be collected by the Union
Budget 2004-05.
.07
For a Central Revenue Plan, this amount of Rs. 610 crs. is
indeed an insignificant contribution but the
same has indeed a very large cost attached as at stake is
" the trust and confidence reposed in India by NRIs
across the globe “.
5.
COMMON TAX RATE OF 10% :
.01
If tax is levied, the same may be levied at a uniform tax
rate of 10%.
.02
The tax rate at 10% is suggested in view of existing DTAA with
Indonesia, Oman, Portugal, South Africa and Qatar providing for
withholding tax rate of 10% on interest income of NRIs residing
in said countries.
Whereas DTAA with UAE, which is major source of NRI
Deposits, has withholding tax rate of 12.50%.
And DTAA with USA, UK, Singapore, Canada,
Australia, New Zealand provide for withholding tax at 15%.
.03
As more than 55% of NRE/FCNR Deposits are originated from
UAE, Oman and Quatar and almost 90% of total deposits originate
from all these countries; Residents of said countries being
covered by provisions of relevant DTAA are eligible for tax rate
in the range of 10%, 12.50% or at the most 15%.
.04
Therefore, a
uniform tax rate of 10% should be made applicable to all the
NRIs as regards interest earned from NRE and FCNR Deposits
placed on or after the enactment of the said proposals.
.05
Support for 10% tax rate is also found in the provisions of
Section 115C(f)(iii) whereby a Deposit with an Indian Bank for
36 months or more being defined as a long term capital asset is
subject to tax rate of 10%, vide Section 115E(b)(ii).
.06
The view of fixed deposit being capital asset under
Section 2(14) of the Income Tax Act 1961 and Section 2(e) of the
Wealth Tax Act 1957 is also upheld by Calcutta High Court judgment
of CIT V. East India Charitable Trust. [ (1994) 73 Taxmann 380)
].
6.
PROVISIONS NECESSARY FOR NON FILING OF TAX RETURN :
.01
A matter of grave concern is the applicability of various invisible
provisions of Income Tax Act, 1961, arising out of said tax
proposals whereby in all cases of NRIs having total income
exceeding Rs.50,000, NRIs will be required to :
( i ) apply for Permanent Account Number (PAN) ;
( ii) avail TDS certificates from various banks ;
( iii) prepare
annual accounts ;
(iv ) appoint
a Chartered Accountant or Tax Practitioner
( v ) file tax returns every year and
(vi ) appear
before Tax Authorities in India, if summoned.
.02
For NRIs residing far away and visiting India not very
often, compliance of all these requirements will be a Herculean
task and will cause unwarranted difficulties.
.03 Accordingly , if tax proposals are enacted, then ,
appropriate provisions be introduced granting exemptions to NRIs
absolving them from requirements of filing tax return etc. ,
provided appropriate Tax Deduction at Source from interest on
NRE and FCNR Deposits is made by concerned Bank.
.04
Similar provisions already exist in Chapter XII-A of Income Tax
Act 1961 inserted since 1.6.1983 providing simplified mechanism
of tax collection and non-filing of tax return by NRIs as
regards investment income and long term capital gains arising
out of specified assets.
Section 115G specifically exempts
/ absolves Non Resident Indians deriving income from
specified assets from filing of tax returns if they do not have
other taxable income in India.
7.
SIMPLIFICATION OF PROCEDURAL ASPECTS :
.01
An appropriate provision be inserted, providing for uniform tax
rate on interest income from NRE and FCNR accounts,
.02 relevant provision also be included in Chapter XVII-B for
deduction of tax at source at appropriate rate ,
.03 exemptions from filing of tax return be incorporated ,
subject to deduction of appropriate tax,
.04 said provisions may specifically include NRE and FCNR
deposits with foreign banks and NRE deposits with
Co-Operative banks also, as existing provisions of CH. XII-A
donot include foreign and co-op banks,
.05 appropriate provisions be incorprated for uniform tax rate
of deduction as presently,
Section 195 r.t.w. Para-1(b)(i)(A) of Para-II of the FIRST
SCHEDULE provides for tax deduction at source @ 20%
" on any investment income " and
(ii) Para-1(b)(i)(A) (G) provides for tax deduction at source
@ 30% " on the whole of the other income ".
8. CONCLUSION :
.01 It may be summarised that NRI depositors already
have the option of -
(
i
) being taxed at 10% to 15% taking recourse to provisions
of relevant Article of Double Tax Treaty ( DTAA ) between India
and their home country ;
(
ii
) take recourse to tax of 20% treating the interest as
investment income in case of deposit for 1 year or 2 years as
per provisions of Section 115E(b)(i) ; or
(
iii ) pay tax at 10% on long term capital gains arising out of
cumulative option for 3 years deposit, as per provisions
of Section 115E(b)(ii).
.02
However this would require
tremendous efforts by by each and every individual NRI.
.03 Being acquainted overseas with minimum procedural
requirements regarding tax matters as also till date non
requirement of filing tax returns as regards their NRE and FCNR
deposits in India , the procedural aspects and difficulties may
discourage many of their existing and future investment plans in
India.
.04 As the Government's intentions have been " to remove
all procedural difficulties and impediments for NRIs "
, tax collection should coincide with simplicity and
convenience to honest tax-payers.
.05 With a view to follow said cardinal principles and not to
discourage and dishearten NRIs from retaining their funds in
India and thereby continuing their contribution to the growth of
national economy, it is suggested that tax deduction /
collection should be provided for in a simple and appropriate
manner requiring the banks to deduct tax at source and ABSOLVE NRIs
not having other income above the threshold exemption
limit from the responsibility of filing tax returns in India and
availing PAN etc.
.06 This provisions are of great importance as it may be
appreciated that NRIs have not given prime importance to
monetary income over their emotional ties and economic
development of their mother-land as evident from the fact of
NRE and FCNR deposits increasing from Rs.1,10,021 crores in 2003
to Rs.1,35,422 crores in 2004 inspite NRE interest rates
being reduced from 6.50% to 2.25% p.a. in a short span of
last 12 months.
9. RETURNEE NRIs :
.01 Presently NRIs returning to India for
permanent settlement are exempt from income-tax as regards their global
income and interest income of continued FCNR deposits and also
Resident Foreign Currency ( RFC ) deposits so long as their
residential status under the Income Tax Act,1961 is determined
as ' Non-Resident ' ( NR ) or ' Resident but Not Ordinarily
Resident
(R but NOR).
.02 Normally for NRIs returning after 8 to 9 years of stay
abroad, said benefits are applicable for 2 to 3 years.
.03 Now the Finance Bill 2004-05 proposes to tax interest from
foreign currency deposits being continued FCNR deposits and RFC
deposits by modifying Section10(15)(iv)(fa) whereby a unique
paradox is created for a returning NRI being :
(i ) granted exemption on interest income arising out of
bank deposits held outside India which otherwise also
offer better interest rates but
(ii) liable to pay tax if such foreign currency accounts
are maintained in India by way of continued FCNR deposit or as
an RFC deposit.
.04 This will simply discourage returning NRIs from repatriating
funds to India and force them to retain the same abroad as
permissible under FEMA,1999.
.05 It cannot be the intention of the Statute to discourage
repatriation of returnee NRI's funds into India and if so
necessary amendments be made to continue tax exemptions provided
by Section 10(15)(iv)(fa) , as per the existing law.
