DTC 2010 - Anomalies - our submission to Hon.Finance Minister
October 30 , 2010.
The Hon. Finance Minister,
Government of India,
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
Cell : 0091 98240 49944.
email firstname.lastname@example.org ; email@example.com
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
.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.
.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.
We, therefore, suggest that a common definition be adapted for granting