Mukesh Patel.in
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NRIs treated as Not Required Indians

Harsh, Illogical & Discriminatory Taxing Provisions For NRIs!

Proposals That Will Hurt The Global Indian Sentiment

Flat Rate of Tax

  • 20% flat tax on interest & other investment income.
  • 30% flat tax on all capital gains.
  • Apart from 20% & 30% TDS on above, TDS at a baffling rate of 35% prescribed on all residual income.

No Personal Exemption

  • No personal exemption or deduction allowed in computing the above income treated as ‘income from special sources.’

Weird Interpretation

  • Poor drafting leads to such a weird interpretation that transfer of a capital asset may attract 30% tax on gross sale consideration.

What a Discrimination?

  • Ironical but true! Non-Indian sports-persons, say Ricky Ponting or Shoaib Akhtar, required to pay a concessional tax of 10% on their game, advertisement and column earnings in India, thus enjoying a more privileged tax status than our own sons of the soil living abroad.

Indubhai Amin, a non-resident Indian (NRI) settled in U.K. earns interest income of Rs.3 lakhs on his non-resident ordinary account bank deposit in India in the current FY 2009-10. Enjoying his personal exemption limit of Rs.1,60,000 and the eligible deduction of Rs.1,00,000 u/s. 80C, Amin is comfortable paying income-tax of Rs.4,000 in the first slab of 10% on his effective taxable income of Rs.40,000.

Flat Tax of 20% & 30%

A huge shock awaits Amin and some millions of NRIs, in regard to taxation of their interest and investment income and capital gains earned in India, proposed to be treated under the draft Direct Tax Code as ‘income from special sources.’

In 2011-12, on the same interest income of Rs.3 lakhs, Amin will be required to pay a hefty tax of Rs.60,000 at the flat rate of 20%, without being eligible to claim any basic exemption or other deduction, as provided under Rule 3 of the First Schedule to the Code.

Moreover, all capital gains earned by a non-resident will attract a flat tax of 30%, irrespective of the amount of capital gains. While a resident Indian will be required to pay tax of Rs.3,84,000 on his taxable income of Rs.Rs.25,00,000, an NRI earning equivalent capital gains will be called upon to pay almost double tax of Rs.7,50,000.

Hair-raising Drafting

New section 13(2) provides that such ‘special income’ shall be computed in accordance with the provisions of the Ninth Schedule, the drafting of which is literally hair-raising. It provides that the amount of accrual or receipt shall be computed as the taxable income, and no loss, allowance or deduction shall be allowed, as the same shall be presumed to have been granted. The only exception in this regard, in respect of capital gains arising from the transfer of equity shares or units of equity oriented mutual fund chargeable to STT, is quite amusing, as it stands redundant in view of the proposal to abolish STT (a classic instance of incoherent drafting).

The draftsman does not seem to have realized the harsh implications. It means that if an NRI sells a capital asset purchased for Rs.10 lakhs at Rs.30 lakhs, he will be required to pay tax of Rs.9 lakhs at 30% on the gross sale consideration of Rs.30 lakhs without any deduction even for the cost of acquisition of Rs.10 lakhs (not to mention any benefit of indexation on the same).

Determination of Residential Status

The residential status of an individual under the Code is proposed to be determined as per the current norms. However, the status of ‘not ordinarily resident’ (NOR) is proposed to be eliminated. Inspite of the above, Clause 24 of the Sixth Schedule has still provided for exemption in respect of interest earned on foreign currency deposits in the case of NOR. Poor drafting indeed!

The Code has proposed to retain the current exemptions availed by a non-resident in case of interest earned on NRE and FCNR deposits with banks.

Special Exemption for Returning NRIs

A useful exemption has been provided in case of income earned outside India, if it is not derived from a business controlled from India, in the financial year in which the returning NRI becomes an Indian resident and the immediately succeeding financial year. However, the benefit of the said exemption would be available, only if such individual was a non-resident for nine years immediately preceding the financial year in which he becomes a resident

Wealth-tax Liability for NRIs

Proposed Section 102 of the Code provides for wealth-tax liability in the case of the value of all global assets of an individual or HUF. However, an exemption has been provided in case of the value of assets located outside India in case of an individual who is not a citizen of India or an individual or HUF not resident in India. Hence, while returning NRIs who are non-citizens will enjoy wealth-tax exemption for their overseas assets, NRIs with Indian citizenship becoming residents will attract wealth-tax liability on such assets held abroad.

Illogical exemption under Wealth-tax

Talking about wealth-tax, the Code prescribes an exemption in respect of any house or plot of land belonging to an individual or HUF, if it is acquired before 1st April, 2000. It is difficult to understand the logic as to why this exemption has been denied in all cases where such immovable property is acquired after 31st March, 2000!

Speak up for the NRIs!

Interestingly, a special Chapter XII-A granting a host of liberal tax concessions to NRIs was for the first time introduced in the present Income-tax Act way back in 1983, by none else but Shri Pranab Mukherjee, who was the then FM. Will the same FM, who was then hailed for laying down the cradle of NRI tax incentives, now take the curse of digging its grave yard?

As for the PM Dr. Manmohan Singh, will he so easily forget the unflinching support extended by the large Indian diaspora, when he ushered economic reforms in the early 1990s?

The taxman can just not be so harsh and hurting! Gujarat, the native soil of hundreds of thousands of NRIs, will need to rise and speak up for their cause!

YOUR COMMENTS INVITED ON…

Do you believe that the  provisions under the Direct Tax Code for taxing NRI income are fair and justified?

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