NRI's CORNER
F.E.M.A.

Shri Arun Jaitley ,
Honorable Finance Minister,
Government of India.
New Delhi

Respected Shri Arun Jaitley ,

Good wishes and my compliments to You and the Team at Finance Ministry for steering forward the Indian economy inspite of global turbulence and domestic uncertainties. Briefly to introduce myself , I am chartered accountant advising overseas Indians over last 26 years and Creator and Chief Executive of NRI centric websites - femaonline.com , showing an edited and updated law of FEMA and www.nribanks.com probably the only website displaying updated interest rates offered by almost all banks to NRIs.

Sir , I am prompted to  suggest levying of  income-tax on interest earned by Non Resident Indians on  Non Resident External (NRE) accounts and  Foreign Currency Non Resident (FCNR) deposits  in the forthcoming budget .

Levying of Income- tax is suggested as the tax exemption granted presently not only results in Revenue Loss to the Indian Government but also no more results in any tax exemption or benefits to the NRIs as these NRIs are in any case required to pay tax on such interest by virtue of their global income being taxed in the country of their Tax Residency. My suggestions are briefly detailed herein together with copy of suggested Section to be introduced in Income Tax Act , 1961.

1.   INCOME TAX EXEMPTION :

Presently interest earned on Non Resident External (NRE) INR deposits is exempt from income tax in India as per the provisions of Section 10(4)(ii) of the Income Tax Act, 1961( IT Act)   &

.02 Interest earned on Foreign Currency Non Resident (FCNR) Deposits is exempt from IT Act in case of Non Resident (NR) and Resident but Not Ordinarily Resident (R but NOR) vide provisions of Section 10(15)(iv)(fa) of the IT Act.

2.     TOTAL NRI DEPOSITS :  

NOW  as per Reserve Bank of India records , Bank deposits of NRIs amounted  to US$ 130.08 bn as on as on 31st August 2016 comprising of :

.01   Non Resident External (NRE) deposits for US$ 74.16 bn ;
.02   Foreign Currency Non Resident (FCNR) deposits for US$ 45.46 bn ;  and
.03   Non Resident Ordinary (NRO) Deposits for US$ 10.46 bn .

3.     INTEREST ON NRI DEPOSITS :

THUS NRE deposits of US$ 74.16 bn will earn  interest of app. 5.93 bn per year at an average rate of 8% per year  &
.02   FCNR deposits of US$ 45.46 bn will earn an average interest of app. 3% i.e. US$ 1.36 bn.
.03   As such the total tax free interest earned by NRIs amounts to US$ 7.29 bn per year.

4.     TAX EXEMPTION AMOUNT :  

THEREFOR IF INCOME TAX IS LEVIED AND COLLECTED AT SAY 15% ON THIS INTEREST INCOME OF US$ 7.29 BN IT WILL RESULT IN DIRECT TAX COLLECTION OF APP. US$ 1.09 BN WHICH IS EQUIVALENT TO INR 7410 CRORES PER YEAR.

5.     IGA & CRS REQUIRES INFO TO NRI's COUNTRY OF RESIDENCE : 

Till last year  out of ignorance or negligence great many NRIs didnot disclose tax free interest earned on NRE and FCNR deposits in India in tax computation of their country of Residence and thereby enjoyed total tax exempt interest income .
.02  This fact is evident from the USA offering an opportunity to declare overseas / Indian income and financial assets under the Streamline Domestic Offshore Procedures Scheme .
.03  And  as India has already signed Inter Governmental Agreement (IGA) with USA on the 9th July 2015 whereby accounts of NRI US Persons / US Tax Residents as on 30th June 2014 are to be reported to Internal Revenue Service ( IRS ) of USA  and 
.04   Common Reporting Standards (CRS) Agreement signed by 84 countries  including  India requires information about bank accounts of  NRIs and Tax Residents of these 84 countries as on 31st December 2015 to be reported to NRI's country of Residence
.05  AND therefor it is necessary and compulsory for all Indian Banks to report US NRI's interest income earned on NRE & FCNR deposits to IRS in USA and also to these 84  countries being country of NRI's  Tax residence and
.06   Therefor all NRIs in USA and these 84 countires will be required to pay tax on interest earned in India on NRE & FCNR deposits in USA or CRS Signatories .

7.   NOW NO TAX EXEMPTION : 

As such so called tax exemption granted by Indian Government for interest earned on NRE and FCNR Deposits by NRIs is now not being enjoyed by NRIs at all but is enjoyed by their country of Residence as Tax Regulations of NRI's country of Residence levies and collects income tax on global income  which includes interest earned in NRE and FCNR Deposits.

8.   TAX CREDIT FOR 15%  :

Double Taxation Avoidance Agreements (DTAAs) of almost all the countries as also Domestic Tax Laws of almost all the countries provide for credit for taxes paid in Source Country while taxing the overseas income of Tax Residents in their country of Residence .

.02 As such tax paid in India on the interest of NRE and FCNR Deposits in India will be deductible from total tax payable on this interest income in NRI's country of Residence.
.03 Therefor effectively NRIs will not any more tax then the tax payable in their country of Residence while INDIA will be enriched by TAX COLLECTION of app. Rs. 7400 crores EVERY YEAR.

9.    NRIs in MIDDLE EAST :

NRIs residing in Middle Eastern Countries like UAE , Muscat , Sultanate of Oman , Doha, etc. may have serious concerns for deduction of tax at source as they do not have any personal Income Tax in the country of Residence.
.02   Moreover, taxing of Non Resident External (NRE) and Foreign Currency Non Resident (FCNR) Deposits is also to collect tax which otherwise is payable to Foreign Governments like USA, UK, etc. Which is not the case in Middle Eastern Countries.
.03   To mitigate the difficulties it is proposed that NRIs who are Permanent Residents of Middle Eastern countries and other countries wherein individual Income Tax is not levied be granted total exemption from income-tax on interest earned on NRE and FCNR accounts and no tax be deducted at source in such cases .
.04    And further to simplify the issues NRIs in Middle Eastern countries be required to provide :
.041  Tax Residency Certificate or Residential Permit or Resident or Work visas ;
.042  Simply provide certified copy of Residential Permit with validity for the relevant Financial Year (FY) and
.043  Banks be instructed to not to deduct tax at source in case of NRIs who submit such copies of Visas or Residential Permits.


10.  TAX FILING EXEMPTION :

As  filing of income tax returns and tax assessment procedures are genuine concerns for NRIs this difficulty can be mitigated by providing freedom from filing of income tax returns comprising of such NRE and FCNR Deposits.
.02  Appropriately Section 10(4)(ii) and section 10 (15) (iv) (fa) may be abolished.
.03  A new section in line with Section 115 (a)(b) be introduced whereby interest income earned on NRE and FCNR Deposit be taxed at flat rate of  15%.
.04  Banks be required to deduct tax at source at the rate of 15% and
.05  NRE and FCNR account holders be granted exemption from filing IT Returns if they have no other taxable income in India other than interest on NRE ad FCNR deposits and
.06  Tax has been deducted at source by Banks on the interest of NRE and FCNR Deposits.

11.   RATIONALE OF TAX RATE  OF 15% :

The rate of tax is suggested at 15% as the same is universally prescribed and accepted tax rate in majority of Double Tax Avoidance Agreements (DTAAs) as the  tax rate to be charged and collected on interest income by Source Country on the interest earned from on Bank deposits by Tax Residents of other countries.

.02  Reference Article 11 of India - USA Tax Treaty and Article 12 of India - UK Tax Treaty .

Sir , if any clarifications or explanations are required I shall be happy to provide the same and if need be discuss the same personally and now I leave the matter for your kind consideration and appropriate action.

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SUGGESTED SECTION TO LEVY TAX at 15% ON INTEREST ON NRE & FCNR ACCOUNTS  OF NRIs:

PROPOSED SECTION OF INCOME TAX ACT 1961

SECTION : Tax on interest income of Non Resident Indian from Non-Resident (External) Account or Foreign Currency Account in any bank in India

(1) WHERE THE TOTAL INCOME OF AN ASSESSEE, BEING A NON-RESIDENT INDIAN, INCLUDES—

 (a)  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 Management Act, 1999  and the rules made thereunder : 
 (b) any income by way of interest on moneys standing to his credit in a Foreign Currency Account in any bank in India in accordance with the Foreign Exchange Management Act, 1999 (42 of 1999), and the rules made thereunder : 
the income-tax payable by the assessee shall be the aggregate of— 
(i)  the amount of income-tax calculated on income referred to in clause (a) or clause (b) at the rate of fifteen per cent; and 
(ii)  the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income referred to in clause (a) or clause (b) :
Provided that no deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the income referred to in clause (a) or clause (b) .
Provided further that such individual is a person resident outside India as defined in clause (w) of section 2 of Foreign Exchange Management Act, 1999 and upon his return is a Non Resident or Resident but Not Ordinarily Resident as defined in Section 6 of Income Tax Act , 1961.  

(2) IT SHALL NOT BE NECESSARY FOR THE ASSESSEE TO FURNISH UNDER SUB-SECTION (1) OF SECTION 139 A RETURN OF HIS INCOME IF
(a)  his total income in respect of which he is assessable under this Act during the previous year consisted only of income referred to in clause (a) or clause (b) of sub-section (1); and 
(b)  the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.

 


 

 

 

 
Aug-16
  NRI DEPOSITS (US$ Million)
  NRI Deposits FCNR(B) NR(E)RA NRO
Amount 1,30,079 45,459 74,163 10,457
Interest % --- 3 8 0
Interest Amount   1363.77 5933.04 0

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with respectful regards

sincerely

RAJESH H DHRUVA
Chief Executive

femaonline.com
Tel. No. : 0091 281 2453367
Cell : 0091 98240 49944  

 

 

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