H P Agrawal: Restore tax benefits to NRIs

FOREIGN ENTERPRISES

The Finance (No 2) Bill, 2004 has proposed changes in respect of tax on non-residents' income in India, which will have a far reaching impact on the non-resident Indians.

Benefit of treating the interest in a non-resident (external) account as free of tax under Section 10(4)(ii) is proposed to be withdrawn in respect of interest paid or credited on or after September 1, 2004.

Non-resident (external) accounts are maintained by non-resident Indians in India. The accounts are operated in foreign currency. Such accounts have helped the country in the inflow of foreign exchange into India.

In fact, the government has all along been persuading the non-resident Indians to keep their funds and investments in India.

Accordingly, the tax-free status of interest on non-resident (external) account was introduced by the Finance Act, 1965. Several subsequent amendments were made to make the provisions more liberal and to allure NRIs to keep foreign currency in India.

The Budget for 2004 proposes to withdraw the exemption, which has remained in the Statute for nearly 40 years. It only reflects lack of wisdom because it may cause diversion of foreign exchange reserves from India to NRIs' countries of domicile.

Likewise, the provisions relating to interest on foreign currency deposits are also proposed to be amended by the Finance (No 2) Bill, 2004 to the effect that the interest payable on foreign currency deposits on or after September 1, 2004 will become liable to tax in India.

Under the provisions in Section 10(15)(iv)(fa), the interest payable by a scheduled bank to a non-resident or to a person who is "not ordinarily resident" on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India shall not be included in computing his total income.

It is proposed by the Finance (No 2) Bill, 2004 that the exemption shall stand withdrawn in respect of such interest payable on or after September 1, 2004.

The provision was also meant to encourage NRIs to keep their deposits in foreign currency in India. The said provision has also been in the Statute since 1991. It is difficult to understand the logic of such amendment after 14 years.

NRIs continued to enjoy a major tax benefit in India even after they returned to India.

Under the provisions of the Income Tax Act as prevailed until financial year 2002-2003, such non-residents, on their return to India, were put in the category of "resident but not - ordinarily-resident", which status remained valid for the nine years after their return.

For this purpose, however, the NRI had to stay abroad for at least two years before his return to India. The benefit of the status of not ordinarily resident was that this category of taxpayer was not liable to pay any tax in India on his foreign income. This helped NRIs to retain their wealth and income outside India while they continued to live in India for a considerably long period.

It is unfortunate that drastic amendment was made by the Finance Act, 2003 to the effect that the status of not ordinarily resident will now be available for a maximum of 2 years only.

The aforesaid proposals, with a little financial gain to the exchequer, will inflict a serious blow on NRIs' investment in India, which will hardly be in the national interest.

agar@nda.vsnl.net.in