Unstudied approach

Good news for students studying abroad as they are now going to be treated as NRIs

There is good news for students studying abroad. Students are not dependent for a dominant part of their expenses on remittances from their households in India. Often they undertake certain related financial transactions.

Thankfully, the uncertainties of the legality of remittances of savings from such transactions to India have become history. Students going abroad can now enjoy dual Residentship. Perhaps this is a forerunner to dual citizenship.

Through Circular No 45 dated December 8, 2003, RBI has declared that for the purpose of FEMA, students will be treated as NRIs as soon as they go abroad for studies.

One of the conditions under which FEMA treats a person as an NRI is if his stay abroad is for an uncertain period. It has now been clarified that this part of the definition will be applied to students.

It has also been clarified that these instructions do not dilute in any way the utilisation of the existing foreign exchange remittance facilities to students in regard to their academic pursuits.

Consequently, they will be eligible for the benefits available to them as Residents as well as Non-Residents.

They are now eligible to receive remittances from India i) up to $ 100,000 from close relatives from India on self-declaration towards maintenance, which could include remittances towards their studies ii) up to $ 1 million out of sale proceeds and balances in their account maintained with an AD in India iii) educational and other loans which were availed (as residents in India) by students would be allowed to continue iv) all other facilities available for NRIs under FEMA.

Before this clarification, students, particularly those who received scholarships, fellowships or took part-time assignments had no incentive to save something from their earnings.

There was no legal avenue to send some money to their family members in India or bring it along with them when they visited India or returned to India permanently.

Some relief has been offered by RBI Notification FEMA 11/2000-RB dated May 3, 2000, according to which, a resident is allowed to retain up to $ 2,000 or its equivalent in aggregate, provided that such foreign exchange in the form of currency notes, bank notes and travellers' cheques was acquired by him for various specified purposes. The rest of the forex was required to be surrendered to the authorised dealers.

Most of the students avoided this inconvenience by either keeping their forex savings abroad or using the illegal hawala route.

I have repeatedly observed that most often than not, the authorities in India do not have a total perspective of the problem on hand, resulting in taking only partial action which, in many cases turns out to be worse than no action.

It was necessary to change the ITA definition of NRI simultaneously or issue a suitable clarification.

The ITA defines an NRI negatively as "A Resident is one who during a Financial Year (FY) which is from April to March, satisfies any one of the following two basic conditions:

He is in India for at least
a) 182 days in the FY or
b) 365 days out of the preceding 4 FYs and 60 days in the FY

If an Indian citizen leaves India in any year for the purpose of employment, or as a member of the crew of an Indian ship, the 60 days in the clause 'b' above is to be replaced by 182 days.

A person who is not a resident is an NRI."

During the very first year of the student going abroad, he remains a Resident in India even if his stay in India is less than 182 days just because he was in India for 365 days out of the preceding 4 FYs.

He becomes an NRI only if his stay in India for that FY was not 60 days or more. The same is the situation during the next few years.

Yes, eventually he may become an NRI for ITA but until then, his global income is taxable in India. Yes, the Double Taxation Avoidance Agreements between their host countries and India does provide some relief.

In practice, I have not come across any student who has paid any tax in India. They took recourse to either keeping their forex savings abroad or using the illegal hawala route.

I am afraid, the student will continue doing so, unless he has become an NRI in due course. Otherwise, whatever forex he brings to India, even if approved by FEMA, will be taxed in India.

I am afraid, in spite of this notification of FEMA, we are at square one. The good news is not so good!

Deputies
As I observed earlier, the authorities are not in touch with the soul of the problem and have no totalistic approach. Let us take the case of deputies.

A deputy of an Indian company placed abroad does not leave India in any year for the purpose of employment since he is already employed in India.

Therefore, a deputy going abroad for the first time will always be a resident in India, whether his stay during that year was more than 182 days or not. The fact that he was in India for the preceding year for more than 182 days makes him a resident. During the subsequent years he ---

• will be a resident if his stay in India during the previous year was more than 182 days;
  
• will be an ROI if his stay in India during the previous year was 182 days or less.

For ITA he faces the same difficulty as that of a student and more!

The source of his salary is an Indian company and therefore if he is paid a salary abroad, the whole of it is taxable in India.

Moreover, allowances granted to cover expenses incurred wholly, necessarily and exclusively in performance of office duties are not taxable. It would be illogical to impose any tax on such allowances.

Any saving effected out of this allowance obtains the colour and character of salary, taxable in India, whether remitted to India or not.. This is so even if he is an NRI for the ITA.

To bypass this problem, many employee-friendly organisations incorporate abroad an independent body distinct from the Indian company and the employee is transferred to this body.

The Indian company does not reimburse the foreign entity the emoluments paid and therefore, such forex income is not taxable in India.

To conclude
NRI status should be granted to students for ITA and to deputies for both FEMA and ITA.

The author may be contacted at anshanbhag@yahoo.com