created by Rajesh Dhruva

Representation to Finance Ministry & Financial Institutions  » DTC 2010 - Anomalies - our submission to Hon.Finance Minister - 30.10.2010

October 30 , 2010.

To
The Hon. Finance Minister,
Government of India,
New Delhi.

Honourable Sir,

Good wishes.

Sub:-    "Anomalies & Different Criteria of Residential Status in DTC - 2010 as re: NRI Income"

The final draft of Direct Tax Code - 2010 [DTC]  has certain anomalies which can create significant  difficulties for overseas Indians as regards  their interest income from Foreign Currency Non Resident [ FCNR ] bank deposits in India . Moreover three different criteria of residential status as regards exemption of Non-Resident Indians (NRIs) income from Non-Resident External (NRE) accounts and Foreign Currency Non Resident (FCNR) accounts as also for exemption of tax on global income of NRIs have also created lot of confusions and anxieties as also reported in " The Economic Times. " (Annexure 8) 

The facts and arguments are mentioned herein with appropriate suggestions for rectification.
I respectfully request you to look into the same and if my arguments find favour, do the needful for appropriate correction.

Thanking you in anticipation

Sincerely, 

RAJESH H DHRUVA
Chief Executive
femaonline.com
Tel. No. : 0091 281 245 3367 (four lines) / 245 9613

Cell : 0091 98240 49944.

email  rajesh@femaonline.com ; keynote@nribanks.com

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I      ANOMALIES in DTC - 2010 AS RE: NRI INCOME

 

1.   INTEREST ON FCNR DEPOSITS -  EXEMPT ONLY IN CASE OF NON-RESIDENT DEFINED UNDER DTC

Bank deposits of Non Resident Indians [NRIs] have been a major contributor of foreign exchange reserves for a long time whereby NRIs continue to contribute in the growth of nation's economy. Twenty years back when the nation faced severe forex reserves crises, NRIs support and contribution in State Bank of India's (SBI) India Development Bonds laid the foundation stone in restoring and enhancing the forex reserves. Various forex bonds offered between 1990-2000 to NRIs being  NRI Bonds 2nd Series ; Resurgent India Bonds and  India Millennium Deposits also played a key role not only in adding to  the forex reserves but also in strengthening financial foundations of Indian economy.

Over a period of time,  incremental global investments have built strong forex reserves resulting in lower interest being offered to NRIs in rupee and foreign exchange deposits. However this lower interest rates have not diminished NRIs confidence and interest in bank deposits in India and the flow of Non Resident External [NRE]  and Foreign Currency Non Resident [FCNR] deposits continues to be strong as reflected in balance of FCNR deposits of US$ 14.75 bn ; US$ 26.11bn of NRE rupee deposits and US$ 7.88bn of NRO rupee deposits, totaling to US$ 48.75 bn as on 31st August '10.

2.  The Direct Tax Code 2010 [DTC] has granted tax exemption on interest on NRE accounts to an NRI who is defined as a "person resident outside India" under Foreign Exchange Management Act , 1999 [FEMA].  (Para. 23 of the Sixth Schedule of DTC - Annexure 1)
.02  However,  tax exemption re: interest on FCNR deposits is restricted to an NRI who is defined as "Non-Resident" under the DTC.( Para. 24 of Sixth Schedule of DTC - Annexure 2)

3.  Now, under FEMA for determining residential status of an NRI his stay in India is not considered at all and therefore an NRI visiting India for a period exceeding 181 days , say even 365 days in a year will also continue to be defined as "person resident outside India" so long as he does not return to India for permanent settlement.

4.   Whereas under DTC , a "Non Resident " is defined as a person whose stay in India :

.01 does not exceed 59 days in a financial year or
.02  if it exceeds 59 days in a financial year then his stay in India in immediately preceding four years does not  exceed 364 days ". ( Section 4 of DTC -Annexure 3)

5.  Earlier  under the Income Tax Act, 1961 [IT Act]  interest income of NRIs and returning NRIs were granted tax exemption as mentioned herein :-
.01 Interest income on NRE account was exempt in case of person defined as "Person residing outside India" under Foreign Exchange Regulation Act, 1973 [FERA] defined in Section (q) r.t.w. 2(p) of FERA. (Section 10(4)(ii) of ITAct- Annexure 4) 
.02 Interest on FCNR accounts of  NRIs was exempt in case of a person defined as  Non Resident and also Resident but Not Ordinarily Resident [R but NOR].which allowed an NRI a stay upto 181 days in a financial year as basic criteria . (Section 10(15)(iv)(fa) of ITAct - Annexure 5 & 6)   

2.      ANOMALIES :

 Under the DTC , Interest income of Non-Resident External (NRE) accounts, FCNR deposits as also global income are treated separately and have unique conditions for each of said incomes being :-
.01  Interest on NRE accounts - Exemption for all NRIs residing abroad irrespective of number of days of their stay in India.
.02  Interest on FCNR accounts - Exemption for NRIs who fulfill the conditions of Non Resident under DTC.
.03 Global income being exempt in case of an NRI who have been non-resident in 9 out of immediately preceeding 10 years or whose stay in immediately preceding 7 years does not exceed 729 days.
.04  As all are aware, NRIs more often visit India for personal, social as also family reasons and many a times their stay exceeds 59 days in a financial year.
.05  The present exemption for interest on FCNR accounts to NR and R but NOR is additionally linked to stay of 181 days or less is in line with globally accepted definition of a "Resident" being linked to a stay of six months or so. 

3.      REMEDIAL SUGGESTIONS :
.01 If such differentiation in granting exemption to NRIs on NRE and FCNR interest is not the intention of the Statue then alternative remedial  suggestion for rectification of the anomalies are posted herein.
"In tune with the exemption granted as re: interest on NRE accounts exemption may also be granted  as re: interest income from FCNR accounts  to NRIs who are covered by the definition of "Person residing outside India "under FEMA."

.02 The argument  finds support in fact of  the Statute of IT Act not having such discrimination in granting tax exemption to NRIs on their NRE rupee deposits viz a viz FCNR forex deposits.
.03  Moreover, as NRIs visit India more frequently for personal as also investment purpose, possibilities of stay exceeding 59 days coupled with 365 days in earlier four years will make them vulnerable and the only alternative for such NRI will be to withdraw FCNR deposits from Indian banks and place the same with overseas banks outside India.

4.     REQUEST & SUGGESTION :
It is, therefore once again suggested that the tax exemption as regards interest on FCNR deposits may be synchronized with the criteria of tax exemption granted to interest on NRE deposit i.e. interest on FCNR deposit may also be granted exemption in case of NRIs defined as person residing outside India under FEMA.

 

II     DIFFERENT CRITERIA OF RESIDENTIAL STATUS IN DTC - 2010 AS RE: NRI INCOME

 

1      INTEREST ON NRE ACCOUNT :
Interest on NRE account  -  is exempt  in case of an individual who is presently residing outside India in terms of section 2(w) r.t.w. section 2 (v) under  Foreign Exchange Management Act, 1999 [FEMA] . (Section 10 read with para. 23 of the Sixth Schedule  of DTC- Annexure 1)
.02   As such,  this would literally cover every NRI permanently residing abroad.


2      INTEREST ON FCNR DEPOSITS :
Under DTC - 2010, Interest on FCNR account is exempt only if the account-holder is a Non-Resident under DTC (Annexure 2)  i.e. a person whose stay in India :
.01 does not exceed 59 days in a financial year
or
.02  if it exceeds 59 days in a financial year then his stay in India in immediately preceding four years does not not exceed 364 days ". ( Section 4 of DTC -Annexure 3)

3    GLOBAL INCOME :
The DTC - 2010 exempts global income of NRIs  who:- 
.01  has been a non-resident in nine out of ten financial years preceding the relevant current financial year.
OR
.02  has stayed in India for less than 730 days in immediately preceding seven financial years preceding the relevant current financial year.(Para. 29 of Sixth Schedule - Annexure 7)

4     REQUEST & SUGGESTION :
.01    One of the objective of introduction of DTC- 2010 is consolidation and amendment of the Law related to direct taxes.
.02    Universally, taxing statutes  are formulated on the fundamental of justice, equality and simplicity.
.03    Now, incorporating  three different criteria for addressing three separate exemptions for NRIs defeat these very principles.
.04    Moreover, such diversified definitions will add to confusions and create ambiguities amongst NRI community at large.
.05    We, therefore, suggest that a common definition be adapted for granting said exemptions. 

Ideally, the definition  adopted for granting the tax exemption for interest on NRE deposits also be adopted for granting tax exemption for interest on FCNR deposits and global income of NRIs i.e. to an individual who is presently residing outside India in terms of section 2(w) r.t.w. section 2 (v) under  Foreign Exchange Management Act, 1999 [FEMA] .


ANNEXURES:

 Bill No. 110 of 2010

THE DIRECT TAXES CODE, 2010

THE DIRECT TAXES CODE, 2010
A
BILL
to consolidate and amend the law relating to direct taxes.
BE it enacted by Parliament in the Sixty-first Year of the Republic of India as follows:—

CHAPTER I
PRELIMINARY

1. (1) This Act may be called the Direct Taxes Code, 2010.
(2) It extends to the whole of India.
(3) Save as otherwise provided in this Code, it shall come into force on the 1st day of
April, 2012.
------------------

Annexure 1
INTEREST ON NRE ACCOUNT [DTC ]
THE SIXTH SCHEDULE
(See sections 10 and 18 (1) (a))
Income not included in the total income
23. Any amount of interest on deposits in a Non-Resident (External) Account in any bank in India accruing to an individual, if he—
(a) is outside India in terms of clause (w) of section 2 of the Foreign Exchange Management Act, 1999; or
(b) has been permitted by the Reserve Bank of India to maintain the aforesaid account.

Annexure 2
INTEREST ON FCNR ACCOUNT  [DTC ]
THE SIXTH SCHEDULE
(See sections 10 and 18 (1) (a))
Income not included in the total income
24. Any amount of interest payable by a scheduled bank, other than a co-operative
bank, to a non-resident, on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India.

Annexure 3
RESIDENCE IN INDIA [DTC ]
4. (1) An individual shall be resident in India in any financial year, if he is in India—
(a) for a period, or periods, amounting in all to one hundred and eighty-two days
or more in that year; or
(b) for a period, or periods, amounting in all to—
(i) sixty days or more in that year; and
(ii) three hundred and sixty-five days or more within the four years
immediately preceding that year.
(2) The provisions of clause (b) of sub-section (1) shall not apply in respect of an individual who is—
(a) a citizen of India and who leaves India in that year as a member of the crew of an Indian ship; or
(b) a citizen of India and who leaves India in that year for the purposes of employment outside India.

Annexure 4
INTEREST ON NRE ACCOUNT  [Income-Tax Act, 1961]  
Incomes not included in total income.
10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—
[(4) (ii) 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 there under :
Provided that such individual is a person resident outside India as defined in clause (q) of section 298 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account ;]]

Annexure 5

INTEREST ON FCNR ACCOUNT  [Income-Tax Act, 1961]  
Incomes not included in total income.

10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(15) (iv) interest payable—
[(fa)   by a scheduled bank to a non-resident or to a person who is not ordinarily resident within the meaning of sub-section (6)† of section 6] on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India.

 

Annexure 6

RESIDENCE IN INDIA  [Income-Tax Act, 1961]  
6. For the purposes of this Act,—

             (1)   An individual is said to be resident in India in any previous year, if he—

        (a)   is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or

        (b)   [* * *]

        (c)   having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

                      [Explanation.—In the case of an individual,—

        (a)   being a citizen of India, who leaves India in any previous year [as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or] for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

        (b)   being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and [eighty-two] days” had been substituted.]

 

[(6)   A person is said to be “not ordinarily resident” in India in any previous year if such person is—

        (a)   an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less;

 

Annexure 7

GLOBAL INCOME

THE SIXTH SCHEDULE

(See sections 10and 18 (1) (a))

Income not included in the total income

29. Any income accruing to an individual outside India, in a financial year from a source other than a business controlled in or a profession set up in India, if the individual—

(a) has been a non-resident in India in nine out of ten financial years preceding that financial year; or

(b) has during the seven financial years preceding that financial year been in India for less than seven hundred and thirty days.

 

Annexure 8

Sep, 2010, 12.35AM IST, Deepshikha Sikarwar,ET Bureau
NRIs face tax threat under DTC

NEW DELHI: The new direct taxes code could bring a large number of global Indians under the tax net as it does away with a provision that allowed individuals to escape tax in any country citing double tax avoidance.

The new legislation , introduced in Parliament on Monday, says an individual shall be resident in India in any financial year if he is in the country for more than 59 days in that year and has been in India for more 365 days in the four preceding financial years. A number of Indian industrialists including Vedanta’s Anil Agarwal and Essar’s Ravi Ruia have acquired non-resident status over the years.

“The DTC has only attempted to clean up the provision in line with the laws globally,” said an official with the central board of direct taxes (CBDT), the apex direct tax arm of the government .

A phrase “being outside India” in the existing income tax law exempted individuals who stay outside the country for six months from paying taxes. This was prone to misuse and allowed individuals to escape tax in any country, the official said, requesting anonymity.

The new code is expected to come into effect from April 1, 2012.

More than 25 million Indians stay overseas and one million visit the country every year. A large number of NRIs particularly those working in the gulf countries usually visit India for longer durations.

“This could result in a situation wherein the overseas income of NRIs may be subject to tax under certain situations,” said Vikas Vasal, executive director at consulting firm KPMG.

Amitabh Singh, partner at Ernst & Young, said this could become a dampener for the overseas Indian population who routinely visit India to meet their relatives and friends.

“They will now have to restrict their stay to less than 60 or be in danger of becoming tax residents,” he said.

NRIs who have spent 365 days in the last four years, which is permissible under the current income tax law, are at the risk of becoming a resident and facing tax on their global income.

They will be given relief from payment of tax for two years on their global income in the transition period when they become resident from non-resident, a CBDT official said.

The income tax department can define the term “visit” more tightly to ensure that there is no misuse instead of removing the provision altogether, Mr Singh of Ernst & Young said.