Investment opportunities in India


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Investment opportunities in India

  1. 1. C ompendium on Policies, Incentives and Investment Opportunities for Overseas Ministry of Overseas Indian Affairs Indians
  2. 2. + ompendium on Policies, Incentives and Investment Opportunities for Overseas Indians
  3. 3. Price: Rs. 150/- Disclaimer This book has been compiled/summarised from information available in official documents/circulars/websites of the Govt. of India, RBI, information received from various States and other reliable sources. Every possible care has been taken to provide current and authentic information. The Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians is intended to serve as a guide to them and does not purport to be a legal document. In case of any variation between what has been stated in this Compendium and the relevant Act, Rules, Regulations, Policy Statements etc., the latter shall prevail.
  4. 4. Vayalar Ravi Ministry of Overseas Indian Affairs Foreword 1ndia has transformed into a prosperous, dynamic and cosmopolitan country. Technological advances have made India an attractive investment destination. Manufacturing, backend operations and other low-cost industries are being relocated to India. The country is boldly opening itself up to foreign trade and investments, and liberalizing its hitherto previously protected domestic market. India continues to be a land of opportunity at the heart of a resurgent Asia. Our fundamentals are an effective government that exercises fiscal prudence and formulates sound fiscal policies and a strong society founded on the time-tested principles of meritocracy, religious freedom and racial harmony. This book is intended to provide a ready guide to the Overseas Indians. Special attention has been given to the information likely to be sought by Overseas Indians in their interface with their home country. An attempt has been made to consolidate relevant provisions, rules and regulations and present them subject wise in a simple way. I hope this Compendium will help in guiding the Overseas Indians in their efforts to establish business ties with India. Vayalar Ravi
  5. 5. 2HAB=?A )n important service that the Ministry of Overseas Indian Affairs is striving to extend to the Overseas Indians is that of investment services to enable potential Overseas Indian Investors to benefit from India’s rapidly growing economy. As a first step we are bringing out this Compendium for Overseas Indians in which we have attempted to compile the relevant information which an Overseas Indian may require in his initial efforts to establish his business ties with India. The Compendium contains the latest information and has been updated till November 2006 by bringing important but otherwise scattered information from the latest press notes, RBI master circulars, Economic Survey, FDI Manual of DIPP etc. at one place. The language of the book has been simplified by summarising the technicalities and details of rules for the comprehension of the general Overseas Indian. We would welcome suggestions for improving this book in the next edition.
  6. 6. Contents Tax Incentives for Non-Residents H Residential Status for Tax Purposes 2 H Chargeable Income 8 H Special Provisions Relating to Certain Income of NRIs 11 H Exemptions from Income Tax 12 H Exemptions from Wealth Tax 13 H Exemptions from Gift Tax 13 H Presumptive Tax Provisions 15 H Tax Incentives for Industries 17 H Authority for Advance Rulings 18 H Double Tax Avoidance Agreements (DTAA) 20 Foreign Exchange Management Act Relating to Non-Residents H Important Concepts under Foreign Exchange Management Act, 1999 22 H Facilities Available to Returning Indians and Baggage Rules 39 H Bank Accounts of Non-Residents 58 H Foreign Direct Investment 74 H Portfolio Investment Scheme 107 H Immovable Properties 113 H Loans & Overdrafts 123 H Remittance facilities for NRIs/PIOs and Foreign Nationals 129 Other Important Matters H Overseas Citizenship of India (OCI) 132 H PIO Card 143 H Non-Governmental Organisations (NGOs) 145 H Foreign Contributions 153 H Special Economic Zones 160 H List of Important Websites 167 H Contact Details 171 H Feedback Form
  7. 7. T ax Incentives for Non-Residents
  8. 8. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians Tax Incentives for Non-Residents Residential Status for Tax cases: (i) where an Indian citizen leaves India in any year for employment outside India; Purposes and (ii) where an Indian citizen or a foreign In India, as in many other countries, the citizen of Indian origin (NRI), who is outside charge of income tax and the scope of taxable India, comes on a visit to India. income varies with the factor of residence. In the above context, an individual visiting There are two categories of taxable entities India several times during the relevant viz. (1) residents and (2) non-residents. “previous year” should note that judicial Residents are further classified into two sub- authorities in India have held that both the categories (i) resident and ordinarily resident and (ii) resident but not ordinarily resident. days of entry and exit are counted while The law prescribes two alternative technical calculating the number of days stay in India, tests of residence for individual taxpayers. irrespective of however short the time spent Each of the two tests relate to the physical in India on those two days may be. presence of the taxpayer in India in the A “non-resident” is merely defined as a course of the “previous year” which would be person who is not a “resident” i.e. one who the twelve months from April 1 to March 31. does not satisfy either of the two prescribed A person is said to be “resident” in India in tests of residence. any previous year if he An individual, who is defined as Resident in a. is in India in that year for an aggregate a given financial year is said to be “not period of 182 days or more; or ordinarily resident” in any previous year if he b. having within the four years preceding has been a non-resident in India in 9 out of that year been in India for a period of 365 the 10 preceding previous years or he has days or more, is in India in that year for during the 7 preceding previous years been an aggregate period of 60 days or more. in India for a period of, or periods amounting in all to, 729 days or less. The above provisions are applicable to all individuals irrespective of their nationality. Till 31st March 2003, “not ordinarily However, as a special concession for Indian resident” was defined as a person who has not citizens and foreign citizens of Indian origin, been resident in India in 9 out of 10 the period of 60 days referred to in Clause (b) preceding previous years or he has not during above, will be extended to 182 days in two the 7 preceding previous years been in India 2
  9. 9. Tax Incentives for Non-Residents for a period of, or periods amounting in all to, b. being a citizen of India, or a person of 730 days or more. Indian origin within the meaning of Explanation to clause (e) of section Section 6 of the Income-tax Act, 1961, 115C, who, being outside India, comes prescribes the tests for determining the on a visit to India in any previous year, residential status of a person. Section 6, as the provisions of sub-clause (c) shall amended, reads as follows:­ apply in relation to that year as if for the For the purposes of this Act words “sixty days”, occurring therein, the words “one hundred and eighty-two 1. An individual is said to be resident in days” had been substituted. India in any previous year, if he­ 2. A Hindu Undivided Family (HUF), Firm a. is in India in that year for a period or or other Association of Persons (AOP) is periods amounting in all to one said to be resident in India in any hundred and eighty-two days or previous year in every case except where more; or during that year the control and b. [* * *] management of its affairs is situated c. having within the four years wholly outside India. preceding that year been in India for 3. A company is said to be resident in India a period or periods amounting in all in any previous year, if­ to three hundred and sixty five days a. it is an Indian company; or or more, is in India for a period or b. during that year, the control and periods amounting in all to sixty days management of its affairs is situated or more in that year. wholly in India. Explanation: In the case of an individual 4. Every other person is said to be resident a. being a citizen of India, who leaves India in India in any previous year in every in any previous year [as a member of the case, except where during that year the crew of an Indian ship as defined in control and management of his affairs is clause (18) of section 3 of the Merchant situated wholly outside India. Shipping Act, 1958 (44 of 1958), or] for 5. If a person is resident in India in a the purpose of employment outside previous year relevant to an assessment India, the provisions of sub-clause (c) year in respect of any source of income, shall apply in relation to that year as if for he shall be deemed to be resident in India the words “sixty days”, occurring therein, in the previous year relevant to the the words “one hundred and eighty-two assessment year in respect of each of his days” had been substituted. other sources of income. 3
  10. 10. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians DETERMINATION OF RESIDENTIAL STATUS OF AN ASSESSEE UNDER THE INCOME TAX ACT The Tests for determining the Residential status of an assessee under the Income Tax Act can be explained with the help of Flow Charts as follows: 4
  12. 12. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians 6. A person is said to be “not ordinarily days, will not lose his non-resident status resident” in India in any previous year if in the following year(s) if his total stay in such person is­ India in that year (from April 1 to March a. an individual who has not been a 31) does not exceed: non-resident in India in nine out of a. 181 days, if he is on a “visit” to India; the ten previous years preceding that or year, or has not during the seven b. 59 days, if he comes to India on previous years preceding that year “transfer of residence”. been in India for a period of, or periods amounting in all to, seven 3. An NRI who has returned to India for hundred and twenty-nine days or settlement, whose total stay in India for less; or 4 preceding years does not exceed 364 b. a Hindu Undivided Family whose days will not lose his non-resident status manager has not been non-resident in the following year(s) if his total stay in in India in nine out of the ten India in such year(s) (from April 1 to previous years preceding that year, or March 31) does not exceed 181 days. has not during the seven previous 4. A new-comer to India would be treated years preceding that year been in as “not ordinarily resident” for the first India for a period of, or periods two years of his stay in India or if treated amounting in all to, seven hundred as Non Resident in the year of arrival and twenty-nine days or less. then for the second and third year of his An analysis of the above provisions would stay in India. An individual (whether indicate that ­ Indian or foreign citizen) who has left 1. To become a non-resident for Income- India and remains non­resident for at Tax purposes, an Indian citizen leaving least nine years preceding his return to India for the first time to take up India or whose stay in 7 years preceding employment abroad should be out of the the year of return has not exceeded 729 country latest by 28th September and days would, upon his return, be treated should not return to India before 1st as “non-resident” or “not ordinarily April of the next year. However, in case resident” depending upon the number of of a person leaving India for taking up a days stay in India in the year of return. business or profession, the criteria of 60 The status of “not ordinarily resident” days will apply, as defined earlier. will remain effective for 2 years including 2. An NRI individual, whose total stay in or following the year of return as the case India in 4 preceding years exceeds 364 may be. 6
  13. 13. Tax Incentives for Non-Residents Important Points to be Borne in grand parents was born in undivided Mind While Determining the India [Section 115C] Residential Status of an Individual i. Official tours abroad in connection with a. Residential status is always determined employment in India shall not be for the Previous Year because the assessee regarded as employment outside India. has to determine the total income of the j. A person may be resident of more than Previous Year only. In other words, as the one country for any Previous Year. tax is on the income of a particular k. Citizenship of a country and residential Previous Year, the enquiry and status of that country are two separate determination of the residence concepts. A person may be an Indian qualification must confine to the facts national/Citizen but may not be a obtaining in that Previous Year. resident in India and vice versa. b. If a person is resident in India in a Previous Year in respect of any source of Points to be considered by NRIs income, he shall be deemed to be H Previous Year is period of 12 months from resident in India in the Previous Year 1st April to 31st March. Number of days relevant to the Assessment Year in stay in India is to be counted during this respect of each of his other sources of period. Income. [Section 6(5)] H Both the Day of Arrival into India and c. Relevant Previous Year means, the the Day of Departure from India are Previous Year for which residential status counted as the days of stay in India (i.e. is to be determined 2 days stay in India). d. It is not necessary that the stay should be H Dates stamped on Passport are normally for a continuous period. considered as proof of dates of departure e. It is not necessary that the stay should be from and arrival in India. at one place in India. H It is advisable to keep several photocopies f. Both the day of entry and the day of of the relevant passport pages for present departure should be treated as the day of and future use. stay in India [Petition No.7 of 1995 225 H Ensure that date stamped on the passport ITR 462 (AAR)] is legible. g. Presence in territorial waters in India H Keep track of no. of days in India from would also be regarded as stay in India. year to year and check the same before h. A person is said to be of Indian Origin if making the next trip to India. It is he or either of his parents or any of his advisable to maintain a chart for the 7
  14. 14. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians number of days stay in the current and 2. For exemption of income tax in respect in the preceding seven (7) previous years. of NRE and FCNR deposits investor H In the 1st year of leaving India for should be non-resident under FEMA. employment outside India, ensure that 3. The special tax rate concessions on you leave before 29th September. income and long-term capital gains on Otherwise total income of the financial specified assets, purchased in convertible year (including the foreign income) will foreign exchange are available to non- be taxable in India if it exceeds the basic residents under the Income-Tax Act. exemption limit. H During the last year of stay abroad, on Chargeable Income transfer of residence to India, ensure to Section 5 of the Income-tax Act lays down come back on or after Feb 1st (or Feb 2nd the scope of total income of any previous year in case of a leap year). Since arrival of any person. The Section reads as follows: before this date will result in stay in India exceeding 59 days. However, a person 1. Subject to the provisions of this Act, the whose stay in India in preceding four (4) total income of any previous year of a previous years does not exceed 365 days, person who is a resident includes all he may return after September 30th of income from whatever source derived the relevant year without loss of non- which­ resident status. a. is received or is deemed to be received in India in such year by or Implications of Residential Status on behalf of such person ;or for NRIs/PIOs b. accrues or arises or is deemed to The complexities of determining the accrue or arise to him in India during residential status for individual NRI/PIO such year; or under various statutes and regulations will be c. accrues or arises to him outside India obvious from the provisions outlined above during such year: and in this context it would be important to Provided that, in the case of a person note the following: not ordinarily resident in India 1. The concepts and rules for determining within the meaning of sub-section the residential status Income-Tax laws (6) of Section 6, the income which and FEMA are quite different and it accrues or arises to him outside India would be possible to be a resident under shall not be so included unless it is one law and non-resident under the derived from a business controlled in other. or a profession set up in India. 8
  15. 15. Tax Incentives for Non-Residents TABLE Sources of Income R & OR R & NOR NR Indian Income Income received or Taxable in India Taxable in India Taxable in India deemed to be received in India during the current financial year. Income accruing or arising Taxable in India Taxable in India Taxable in India or deemed to accrue or arise in India during the current financial year. Income accruing or arising Taxable in India Taxable in India Taxable in India or deemed to accrue or arise outside India, but first receipt is in India during the current financial year Sources of Income R & OR R & NOR NR Foreign Income Income accruing or arising Taxable in India Not Taxable in Not Taxable in or deemed to accrue or India India arise outside India and received outside India, during the current financial year. Income accruing or arising Taxable in India Taxable in India Not Taxable in outside India from a India Business/Profession controlled in/from India during the current financial year. Income accruing or arising Taxable in India Not Taxable in Not Taxable in outside India from any India India source other than Business Profession controlled from India. 9
  16. 16. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians 2. Subject to the provisions of this Act, the regard to the three categories of taxpayers total income of any previous year of a can be summarised as follows: person who is a non-resident includes all 1. Taxpayers in all categories are chargeable income from whatever source derived on income, from whatever source which­ derived, which is received or is deemed a. is received or is deemed to be to be received in India by or on behalf of received in India in such year by or them or which accrues or arises or is on behalf of such person; or deemed to accrue or arise to them in b. accrues or arises or is deemed to India other than income specified as accrue or arise to him in India during exempt income. such year. In the above context, it may be noted Explanation 1: Income accruing or arising that the ‘receipt’ of income refers to the outside India shall not be deemed to be first occasion when the recipient gets the received in India within the meaning of this money under his own control and it is the section by reason only of the fact that it is first receipt that determines the year and taken into account in a Balance Sheet place of receipt for the purposes of prepared in India. taxation. If the income is already received outside India, no tax liability Explanation 2: For the removal of doubts, it will arise when the whole or any part of is hereby declared that income which has such income is remitted to India. been included in the total income of a person on the basis that it has accrued or arisen or 2. A “resident and ordinarily resident” pays is deemed to have accrued or arisen to him tax in India on his entire world income, shall not again be so included on the basis wherever accrued or received. that it is received or deemed to be received 3. A “non-resident” pays tax only on his by him in India. taxable Indian income and his foreign income (earned and received outside Thus, it is clear from the above that the India) is totally exempt from Indian incidence of tax depends upon a person’s taxes. Residential Status and also upon the place and time of accrual and receipt of income. 4. A “not ordinarily resident” pays tax on taxable Indian income and on foreign In tabular form, the above may be stated in income derived from a business table on previous page. controlled in or a profession set up in As stated earlier, the charge of income tax India. varies with the factor of residence in the 5. An individual upon acquiring the status previous year and the general position with of “not ordinarily resident” would not pay 10
  17. 17. Tax Incentives for Non-Residents tax, for a period of two years, on the gains on transfer of any foreign exchange interest on: asset held by the NRI/PIO. In order to qualify a. the continued Foreign Currency for long-term capital gains, the minimum Non-Resident (FCNR) account; holding period for shares held in a company b. the Resident Foreign Currency or any other security listed in a recognised (RFC) account; and Stock Exchange in India or units of Unit Trust of India or of a specified Mutual Fund c. on income earned from foreign is 12 months and for other assets it is 36 sources unless such income is months. Long-term capital gains on foreign directly received in India or is earned exchange assets are, however, exempted from from a business controlled in or a tax if the net proceeds realized on transfer are profession set up in India. re-invested, within six months of such transfer, in any specified securities and the Special Provisions Relating new assets are retained for at least three to Certain Income of NRIs years. Some of the special tax concessions for NRIs/ The Finance Act, 2003 has withdrawn the PIOs investing in India were introduced in taxing provision in respect of dividend the Finance Act, 1983, which became received by the shareholders on shares held effective on June 1, 1983. The tax provisions in Indian companies. Accordingly, dividend were further liberalised by subsequent received by the shareholders of Indian Finance Acts and other amending laws. companies will be exempt from tax. The income received from units of Unit Trust of Special concessions India and of specified mutual funds will also Investment income from ‘foreign exchange be exempt. assets’ comprising shares and debenture of Finance Act 2004 has: and deposits with Indian companies and Central Government securities, subscribed to a granted tax exemption as regards long or purchased in convertible foreign term capital gains arising from transfer of exchange, is charged to income tax at a flat equity shares in a company and/or units rate of 20%. No deductions are, however, of equity oriented schemes of Mutual allowed and tax is levied on gross income. Funds, which are subject to securities The basic exemption, below which income transaction tax; and is not taxed in India, is also not allowed. b fixed at 10% the tax on short-term Under these special concessions a reduced capital gains arising from such shares and rate of 10% is applied to the long-term capital or units. 11
  18. 18. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians The tax concessions in respect of investment acquisition, expenses incurred in connection income (and not long term capital gain) will with such transfer and the sale price of the continue to apply even after the NRI/PIO capital asset into the same foreign currency returns to India but such exemption would as was initially used in the purchase of these be available only in respect of foreign assets and the capital gain so computed in exchange assets other than shares in Indian such foreign currency will be reconverted companies and the exemption will continue into Indian currency. This computation until such time as the assets are transferred effectively gives the NRI/PIO the benefit of or converted into money. However, as claiming exchange loss, if any, on all capital dividend is exempt income from 1st April gains arising from sale of shares or debentures 2003, exclusion of shares from said provision of Indian companies, whether these are long is redundant. term or short term. It may be noted that the In the circumstances where the income of aforesaid benefit is available only if the NRI/PIO from such foreign exchange assets investment is made from convertible foreign is below the taxable limit or the average level exchange. In respect of investment made of tax is below 20%, he may elect not to be from funds other than convertible foreign governed by the special tax concessions exchange, and if the asset is a long-term referred to above. He would then have to capital asset benefit of indexation can be furnish a Return of Income in the normal availed. However, indexation is not available course together with a declaration of such in respect of debentures. election and he would be entitled to claim a refund of the whole or a part of the tax Exemptions from Income deducted at source, as may be appropriate. Tax As mentioned above, short-term capital Income from the following investments made gains arising from transfer of equity shares by NRIs/PIOs out of convertible foreign and/or units of equity-oriented schemes of exchange is totally exempt from tax. Mutual Funds, which are subject to securities transaction tax, are taxed at 10%. Other a Deposits in under mentioned bank Short-term capital gain is taxable at normal accounts:- slab rates as applicable to residents, and the i Non Resident External Rupee return of income has to be filed by the NRI/ Account (NRE) PIO making such gain. ii Foreign Currency Non-resident Capital gain from transfer of shares or Account (FCNR) debentures of Indian companies will be b Units of Unit Trust of India and specified computed by converting the cost of mutual funds, other specific securities, 12
  19. 19. Tax Incentives for Non-Residents bonds and savings certificates (subject to productive assets like urban land, buildings conditions prescribed under the Income- (except one house property), jewellery, tax laws and regulations). bullion, vehicles, and cash over Rs.50,000/- c Dividend declared by Indian company. etc. The current rate of Wealth-tax is 1 % on the aggregate market value of chargeable d Long term capital gains arising from assets as on 31st March every year in excess transfer of equity shares in a company of Rs.1.5 million. and/or equity oriented schemes of Mutual Funds, which are subject to However, it may be noted that NRIs are also securities transaction tax. liable to pay wealth tax if the market value It should be noted that the tax exemptions of taxable assets as on 31st March exceeds relating to NRE bank deposits cease Rs.l.5 million. immediately upon the NRI/PIO becoming a resident in India whereas the interest on Exemptions from Gift FCNR bank deposits continue to be tax free Tax as long as the NRI maintains the status of Resident but Not Ordinarily Resident or Gift Tax Act, 1958 has been repealed with until maturity, whichever is earlier. effect from 1st October, 1998 and as such, Gift Tax is not chargeable on any gifts made on or after that date. Exemptions from Wealth With regard to gifts of foreign exchange or Tax specified assets made by NRIs to their Where an NRI/PIO returns to India for relatives in India, it should be noted that: permanent residence, moneys and the value 1. Gifts made by an NRI/PIO to his or her of assets brought by him into India and the spouse, minor children or son’s wife will value of assets acquired by him out of such involve clubbing of income and wealth in moneys within one year immediately the hands of the donor-NRI/ PIO. preceding the date of his return and at any 2. In the case of gifts to minor children the time thereafter are totally exempt from clubbing of income, as above, will cease Wealth-tax for a period of seven years after upon such children attaining the age of return to India. 18 years. The above exemption may not have much 3. The clubbing provisions will apply, in relevance now since the Finance Act 1992 case of gift to spouse or son’s wife in India, has considerably reduced the scope of only to the’ first-stage of income from the Wealth-tax. With effect from 1st April, 1993, original gift. Second-stage income arising Wealth-tax is being levied only on non- from investment of the income from the 13
  20. 20. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians original gift is not clubbed and this will under that head “Income from other constitute the separate wealth/income of sources” for and from assessment year the donee spouse. 2005-06 and onwards. Generally, the income of minor children, However, the above provisions will not apply from any source (including income from gifts to any sum of money (gift) received:- from parents) is clubbed with the income of a. from any relative; or the parent whose total chargeable income is greater. b. on the occasion of the marriage of the individual; or Other matters to be noted regarding gifts are c. under a will or by way of inheritance; or 1. All gifts received by residents from NRIs/ d. in contemplation of death of the payer. PIOs may be subject to the tax authorities requiring the recipient to The term “relative” is defined as: provide evidence as regards the identity 1. spouse of the individual; and financial capacity of the donor and 2. brother or sister of the individual; genuineness of the gift. 3. brother or sister of the spouse of the 2. Under the Foreign Exchange individual; Management Act, 1999 no approval from Reserve Bank of India (RBI) is 4. brother or sister of either of the parents necessary for the resident donee to hold of the individual; gifted immovable property outside India 5. any lineal ascendant or descendant of the provided the said property is gifted by a individual; person resident outside India. General 6. any lineal ascendant or descendant of the permission, subject to certain conditions, spouse of the individual; and is granted by RBI for the resident donees to hold foreign moveable properties such 7. spouse of the person referred to in (2) to as shares and securities gifted by NRI/ (6). PIO donors. Scope of Receipts 3. The Income Tax Act has now provided H As per plain reading of the provision, any that any sum of money exceeding receipt without consideration, save Rs. 25,000 received without exclusions, whether capital or otherwise, consideration (i.e., gift) by an individual may be considered as income. from any person on or after 1st September, 2004, the whole of such sum H Similar receipts by any person (such as, will be chargeable to income-tax in the a Partnership Firm, a Company, and assessment of recipient (i.e., donee) AOP etc.), other than an Individual or 14
  21. 21. Tax Incentives for Non-Residents a Hindu Undivided Family, would not However, a non-resident assessee has the constitute income in its hands. option to maintain books of account and get H The provision would apply to an his books of account audited u/s 44AB (“Tax individual irrespective of his residential Audit”) and offer lower profits and gains for status. Accordingly, any receipt in India taxation in India than the profits and gains by a non-resident of the nature discussed estimated under Sections 44BB and 44BBB on presumptive basis. above would be considered as income in his hands. Special provisions applicable to non- H Gifts on occasion other than marriage, residents for computing their income under for example, birthday, marriage the head “Business Income” anniversary and other social occasions, Shipping Business (Sections 44B & religious ceremonies etc., would be 172) taxable as income. Gifts received on the occasion of the marriage of the Section 44B contains special provisions for individual, irrespective of any limit, (but computing profits and gains of shipping business of a non-resident assessee. In the within reasonable limits) would not case of non­residents, such profits and gains constitute income. will be taken at an amount equal to 7.5% H The receipts should be in the form of (seven and a half per cent) of the amount money. Accordingly, any gift in kind paid or payable to the non-resident or to any would not be taxable. other person on his behalf on account of the H The receipts must be without carriage of passengers, livestock, mail or consideration, implying in the nature of goods shipped at any Indian port as also of gift. the amount received or deemed to be received in India on account of the carriage Presumptive Tax Provisions of passengers, livestock, mail or goods Certain provisions have been incorporated in shipped at any port outside India. the Income-Tax Act whereby the total Section 172, which is a complete code in income of certain non-resident assessee is itself, contains provisions for taxation of computed on the basis of certain percentage occasional shipping business of non-residents of their gross total receipts. This estimated in respect of profits made by them from income approach is expected to reduce areas carriage of passengers, livestock, mail or of uncertainty and resultant tax litigation. goods shipped at a port in India. 15
  22. 22. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians Business of Providing Services and Profits and Gains of Foreign Facilities in Connection with Companies Engaged in the Business Exploration etc. of Mineral Oils of Civil Construction or Erection of (Section 44BB) Plant and Machinery or Testing or Section 44BB contains special provisions for Commissioning thereof, in Connection computation of taxable income of a non- with certain Turnkey Power Projects resident assessee engaged in the business of (Section 44BBB) providing services or facilities in connection Section 44BBB provides that, notwithstanding with, or supplying plant and machinery on anything to the contrary contained in Sections hire, used or to be used, in the prospecting 28 to 44AA of the Income-tax Act, the for, or extraction or production of, mineral income of foreign companies who are engaged in the business of civil construction or erection oils. It provides that 10% of the amount paid or testing or commissioning of plant or or payable to, or the amount received or machinery in connection with a turnkey receivable by, the assessee for provision of power project shall be deemed at 10 per cent such services or facilities or supply of plant of the amount paid or payable to such assessee and machinery, shall be deemed to be the or to any person on his behalf, whether in or taxable income of such non-resident out of India. For this purpose, the turnkey assessee. power project should be approved by the Central Government. It has also been clarified Business of Operation of Aircraft that erection of plant or machinery or testing (Section 44BBA) or commissioning thereof will include lying of Section 44BBA contains special provisions transmission lines and systems. for computing profits and gains of the Taxation of Non-Resident’s Royalty business of operation of aircraft of non- Income or Fees for Technical residents. It provides for determination of the Services (Section 44DA) income of non-resident taxpayers on presumptive basis at a flat rate of 5% of the Royalties and fees for Technical Services received from the Government or an Indian amount received or receivable for carriage of concern by a Non-Resident or a foreign persons, livestock, mail or goods from any company in pursuance of an agreement place in India or the amount received or entered into after 31-3-2003 shall be deemed to be received within India on computed under the head “Business Income” account of such carriage from any place in accordance with the provisions of the outside India. Income Tax Act i.e. after allowing deduction 16
  23. 23. Tax Incentives for Non-Residents for various permissible expenses and Infrastructure Sectors allowances. Deduction of 100% of the profits from business for a period of 10 years for: Section 44DA does not permit deduction of following expenses a. Development or operation and i. expenditure which is not wholly and maintenance of ports, airports, roads, exclusively incurred for the business of highways, bridges, rail systems, inland such permanent establishment or fixed water ways, inland ports, water supply place of profession in India, and projects, water treatment systems, ii. amounts reimbursed by permanent irrigation projects, sanitation and sewage establishment to its head office or to any projects, and solid waste management of its other offices (Other than, systems. reimbursement of actual expenses). b. Generation and distribution of power that commence before 31.3.2006. Restriction on Deduction of Head c. Development, operation and Office Expenses (SECTION 44C) maintenance of Industrial Park or Special Section 44C is intended to be made Economic Zone. applicable only in the cases of those non- residents who carry on business in India Capital Gains on Infrastructure through their branches. Funds The deduction in respect of head office Income by way of dividend, interest or long- expenses will be limited to: term capital gain of an infrastructure capital a An amount equal to 5 per cent of the company or an infrastructure capital fund is “adjusted total income” for the relevant 100% tax-exempt. Income of venture capital year: or company or venture capital fund set up to raise funds for investment in venture capital b The actual amount of head office undertaking is also tax exempt. expenditure attributable to the business in India, whichever is least. Tax Exemptions Following tax exemptions are available in Tax Incentives for Industries different sectors: Tax holidays in the form of deductions are Deduction of 100% of the profit from available for private sectors and incentives to business of industries located in special area/regions are listed below: a Development or operation and 17
  24. 24. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians maintenance of ports, airports, roads, Authority for Advance highways, bridges etc. Rulings b Generation, distribution and With a view to avoid a dispute in respect of transmission of power assessment of Income Tax liability in the case c Development, operation and of a non-resident (and also specified maintenance of an Industrial Park or SEZ categories of residents), a scheme of Advance d By undertakings set up in certain notified ruling was incorporated in the Income Tax areas or in certain thrust sector industries Act. The Authority for Advance in the North Eastern states and Sikkim Ruling(AAR) pronounces rulings on the e By undertakings set up in certain notified applications of the non-resident/residents areas or in certain thrust sector industries submitted and such rulings are binding both in Uttaranchal and Himachal Pradesh on the applicant and the Income Tax f Derived from export of articles or Department. Thus the applicant can avoid software by undertakings in FTZ, EHTP/ expensive and time-consuming litigation, which would have arisen from normal STP income tax proceedings. The application in g Derived from export of articles or such cases should be addressed to software by undertakings in SEZ The Commissioner of Income Tax Authority h Derived from export of articles or of Advance Ruling software by 100% EOU i An offshore banking unit situated in SEZ 5th Floor, NDMC Building from business activities with units Yashwant Place, located in the SEZ Satya Marg, Chankaya Puri, j Derived by undertakings engaged in the New Delhi-110021 business of developing and building housing projects. The Finance Act 1993 has introduced, with effect from 1st June 1993, a new scheme of k Derived by an undertaking engaged in providing advance rulings on tax matters. the integrated business of handling, storage and transportation of food grains The relevant provisions of this scheme, in the l Derived by an undertaking engaged in Income-tax Act, are as under: the commercial production or refining of 1. “advance ruling” means mineral oil i a determination by the Authority in m Derived by an undertaking from export relation to a transaction which has of wood based handicraft been undertaken or is proposed to be 18
  25. 25. Tax Incentives for Non-Residents undertaken by a non-resident either allow or reject the application. applicant; or Provided that the application will not be ii a determination by the Authority in allowed by the Authority where the relation to the tax liability of a non- question raised: resident arising out of a transaction, a is already pending in the applicant’s which has been undertaken or is case before any income­tax proposed to be undertaken by a authority, the Appellate Tribunal or resident applicant with such non- any Court; resident, and such determination b involves determination of fair shall include the determination of market value of any property; any question of law or of fact c relates to a transaction or issue, specified in the application. which is designed prima facie for 2. The Authority for Advance Rulings, avoidance of income tax. located in Delhi, shall consist of the 5. No application can be rejected without following Members, appointed by the giving an opportunity to the applicant of Central Government: being heard, either in person or through a A retired Judge of the Supreme a duly authorized representative. Also, Court as Chairman. where the application is rejected, reasons b An officer of the Indian Revenue for such rejection have to be stated in the Service who is qualified to be order made by the Authority. member of the Central Board of 6. The advance ruling shall be pronounced Direct Taxes. by the Authority in writing within six c An officer of the Indian Legal months of receipt of the application and Service who is, or is qualified to be a copy thereof, duly signed by the Additional Secretary to the Members and certified in the prescribed Government of India. manner, shall be sent to the applicant 3. The application, for obtaining an and to the Commissioner of Income-tax advance ruling, has to be made in the having jurisdiction over the case. prescribed form in quadruplicate 7. The advance ruling will be binding on accompanied by the prescribed fee and the applicant as well as on the concerned can be withdrawn within 30 days from income tax authorities, only in respect of the date of the application. the specific transaction in relation to 4. The Authority may, after examining the which the ruling is sought. The ruling will application and the records called for remain binding unless there is change in 19
  26. 26. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians law or facts on the basis of which the taxpayers in the international field. The ruling has been given. NRIs/PIOs would, therefore, be well advised 8. Once the subject matter of the to take advantage of such treaties in tax application is rejected or decided against planning for their investments in India. the applicant, there is no provision for DTAA can be defined as an “international appeal. However, in the matter agreement between two sovereign States involving gross mistakes/mis- reaching an understanding as to how their application, the applicant may either file residents will be taxed in respect of cross a writ petition to the High Court or a order transactions in order to avoid double Special Leave Petition with the taxation on the same income”. Supreme Court of India In yet another way, DTAA can be defined as 9. The Authority is empowered to declare “an agreement of compromise between two the advance ruling void, on ground of contracting States whereby each country fraud or misrepresentation of facts by the agrees to give up something in consideration applicant. of the other country giving up something in While it must be remembered that the its favour”. advance ruling has no direct general It may sometime happen that owing to applicability and is binding only in the case reduction in tax rates under the domestic of the particular applicant, it may have law-taking place after coming into existence considerable value as a persuasive precedent of the treaty, the domestic rates become more for other concerned individuals. favorable to the NRIs/PIOs. Since the object of the tax treaties is to benefit the NRIs/PIOs, they have, under such circumstances, the Double Tax Avoidance option to be assessed either as per the Agreements (DTAA) provisions of the treaty or the domestic law The Government of India has entered into of the land. double taxation avoidance agreements (tax In order to avoid any demand or refund treaties) with several countries with the consequent to assessment and to facilitate principal objective of evolving a system for the process of assessment, the concerned the respective countries to allocate the right authorities in India have provided that tax to tax different types of income on an shall be deducted at source out of payments equitable basis. Tax treaties serve the purpose to NRIs/PIOs at the prevailing rates at which of providing full protection to taxpayers the particular income is made taxable under against double taxation and also aim at the tax treaties. preventing discrimination between the ■■ 20
  27. 27. Tax Incentives for Non-Residents F oreign Exchange Management Act Re l a t i n g t o N o n - Re s i d e n t s 21
  28. 28. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians Important Concepts Under Foreign Exchange Management Act, 1999 Illustration: If an Indian Company opens a Introduction branch in New York, U.S.A., that branch will Foreign Exchange Management Act, 1999 become resident of India and, therefore, all (FEMA) replaced Foreign Exchange restrictions applicable to Indian residents for Regulation Act, 1973 (FERA) with effect overseas transactions are equally applicable from 1st June 2000. The replacement was a to such a branch. Then right from opening great sigh of relief for the people as FERA was of a bank account to entering into any unduly stringent in its criminal provisions. transaction of capital nature (e.g., acquisition FEMA is a civil law and proactive in its of premises), it will need prior approval from outlook compared to FERA. The thrust of RBI (subject to exemptions/general FEMA is to “manage” the scarce foreign permissions granted by RBI under various exchange resources of the country rather Notifications). than to “control” them as was prevalent under FERA. FEMA met the need of the day in the changed economic scenario of India, Residential Status especially since 1991. One of the important changes in FEMA relates to the “Residential Status of a Person”. Applicability of FEMA The terms “person” and “person resident in FEMA is applicable to the whole of India. India” are defined under sections 2(u) and The expression “whole of India” would 2(v) of FEMA, respectively. Ironically, like indicate that the provisions of the Act are FERA, FEMA, too, does not define the term applicable to all transactions taking place in Non-Resident. Section 2(w) defines “person India. Thus, any person who is present in resident outside India” as a person who is not India at the time of transaction has to comply resident in India(For all practical purposes, with the provisions of FEMA. the term “person resident outside India” is synonymous with the term “non-resident” FEMA is applicable to all branches, offices and these terms are used interchangeably in and agencies outside India owned or this book). controlled by a person resident in India. Thus, FEMA has retained its extra-territorial Let us look closely at these two important jurisdiction, as under FERA. definitions under FEMA:- 22
  29. 29. Important Concepts Under Foreign Exchange Management Act, 1999 Definition of “Person” a for or on taking up employment Section 2(u) “Person” includes outside India, or b for carrying on outside India a i an Individual, business or vocation outside ii a Hindu Undivided Family (HUF), India, or iii a Company, c for any other purpose, in such iv a Firm, circumstances as would indicate v an Association of Persons (AOP) or a his intention to stay outside Body of Individuals (BOI), whether India for an uncertain period; incorporated or not, B a person who has come to or stays in vi every artificial juridical person, not India, in either case, otherwise than- falling within any of the preceding sub- clauses, and a for or on taking up employment in India, or vii any agency, office or branch owned or controlled by such person.” b for carrying on in India a Explanation: The above definition is similar business or vocation in India, or to the definition of “person” under Section c for any other purpose, in such 2(31) of the Income Tax Act, with some circumstances as would indicate minor differences like exclusion of local his intention to stay in India for authority and inclusion of category (vii) an uncertain period; above. This definition is unique to FEMA, ii any person or body corporate registered not found under FERA. The idea evidently or incorporated in India, is to provide clarity about its applicability and extend its coverage. iii an office, branch or agency in India owned or controlled by a person resident “Person Resident in India” outside India, Section 2 (v): The term “person resident in iv an office, branch or agency outside India India” means owned or controlled by a person resident in India; i a person residing in India for more than one hundred and eighty-two days during Explanation the course of the preceding financial year An attempt has been made to link the but does not include definition of the person resident In India A a person who has gone out of India (PRI) under FEMA with the definition of or who stays outside India, in either that term under the Income-Tax Act 1961, case by providing the criteria of physical stay of 23
  30. 30. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians 183 days or more in India, in so far as the financial year 2003-2004, i.e. from 1st individuals are concerned. April 2003 to 31st March 2004 his stay was less than 183 days. Assuming that he stays Practical Aspects in India through out the financial year 2004- I First of all, “Financial Year” is not defined 2005, he would be a non-resident under under FEMA. FEMA for the financial year 2004-2005 For the sake of understanding, we assume notwithstanding the fact that he was in India it to be from 1st April to 31st March, being for more than 182 days, as his presence in the official year of the Government of India during the preceding financial year, i.e. India. Secondly, the Income-Tax Act 2003-2004 was for a period of less than 183 requires physical presence of 182 days or days. more, whereas, FEMA requires 183 days In order to avoid this anomaly, the definition or more. Thirdly, the term “ residing in of a “Person resident in India” needs to be India” is not defined. We may assume interpreted in a manner that leads to a logical that it is equivalent to physical presence conclusion. in India. Under FERA, a person’s residential Determination of the Residential status was determined based on his Status Under FEMA intention alone, rather than his physical presence in India. FEMA has attempted Individuals to blend the two different definitions as In order to make a definition of a person prevailed under FEMA and the Income- resident in India workable one has to look Tax Act 1961, resulting in confusion. first at the exceptions given in clauses (A) II The Income-Tax Act considers the and (B) and if the person is not falling under physical presence of a person in the either of them, then look at his physical current financial year for determining his presence in India during the preceding tax liabilities of the current year, whereas financial year. Thus, in effect, the criteria, for FEMA considers physical presence of a determination of residential status of a person in the preceding financial year, person under FERA based on “facts and with the result that a person might have intentions”, are retained under FEMA, too, to wait for one and a half year to become as it is evident from the examples given resident in India. herein below: Consider the following illustration:- Examples Mr. Sangwan comes to India after a Mr. Mishra leaves India on 1st December continuous stay abroad for 2 years. During 2004 for taking up employment outside 24
  31. 31. Important Concepts Under Foreign Exchange Management Act, 1999 India for the first time. What will be his 2004 notwithstanding his stay exceeding 182 residential status? days in the current year, as in the preceding financial year (i.e. F.Y. 2002-2003), he was Mr. Mishra will be considered as a non- not in India for 183 days or more. As far as resident, w.e.f. 1st December, 2004 the F.Y 2004-2005 is concerned he would be irrespective of the fact that he was residing resident from 1st April 2004 till 31st October in India for more than 182 days in the 2004, (as his stay in F.Y. 2003-2004 would preceding financial year (i.e. 2003-2004), for have exceeded 182 days). Mr. Shah would be the reason that he is covered by Exception NR, w.e.f. 31st October 2004 as he would be (A) (a) of the definition. leaving India for an uncertain period covered Mrs. Katrina a foreign citizen of non- by exception mentioned in clause A(c). Indian Origin sets up a proprietary concern in India on 1st June 2004 for carrying on Residential Status of a Student business. What will be his residential status Leaving for Overseas for the for the financial Year 2004-2005? Purpose of Education The situation is covered by exception B (b). A student leaving India for the purpose of Mrs. Katrina will be considered as resident further education was treated as a resident in India w.e.f 1st June 2004 as he came to by the Reserve Bank of India unless he takes India for carrying on business, irrespective of up employment overseas even though his the fact that he has not at all stayed in India stay in India was less than 183 days. On during the preceding financial year (i.e. F.Y review of the situation, Reserve Bank has 2003-2004). liberalised the provisions as follows: Mr. Singh, who is staying in Dubai for A student leaving abroad for the purpose of more than ten years, has to come to India further education would be treated as a Non- on 1st July 2003 for medical treatment. He Resident Indian on the grounds that his stay has not visited India during F.Y. 2002- abroad is for more than 182 days in the 2003. He is planning to return to Dubai preceding financial year and that his after medical treatment is over. Doctors intention is to stay abroad for an uncertain have advised him to stay in India up to 31st period. As a non-resident, the student would October 2004. What will be his residential be eligible for receiving following remittances status under FEMA? from India (Circular No. 45 dated December 8, 2003). Mr. Singh is not covered by any of the exceptions laid down under clause (B) as his 1. up to USD 100,000 from close relatives intention to stay in India is for a specific from India on self-declaration towards period. He will be non-resident in F.Y. 2003- maintenance and studies, 25
  32. 32. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians 2. up to USD 1 million out of sale proceeds/ considered as “resident in India”. Even balances in his account maintained with though such entities are treated as resident an authorised dealer in India, in India, under section 6(6) of the Act, RBI 3. all other facilities available to NRIs under is empowered to prohibit, restrict or regulate FEMA, their establishment as well as activities in India. Notification No.FEMA/22/RB-2000 4. educational and other loans availed of by deals with Regulations pertaining to students as resident in India can be establishment of such entities in India. One allowed to continue: difficulty here is that the terms “ agency”, Residential Status of Other Entities “ownership” and “control” are not defined. Clauses (ii) to (iv) of sub-section (v) of Clause (iv) section 2 of FEMA deal with determination As per this clause, an office, branch or an of residential status of entities other than agency outside India owned or controlled by individuals. a person resident in India would be considered as ‘resident in India’. This is a Clause (ii) significant departure from FERA where This clause provides that any person or body under such entities were considered as non- corporate (say, HUF, FIRM, AOP BOI, , resident. The consequences of this change COMPANIES etc.), registered or are far-reaching. Under the scheme of incorporated in India would be considered as FEMA, transactions are divided into two “person resident in India”. Here, the distinct categories, namely, Current Account emphasis is on the registration or and Capital Account transactions. Whilst incorporation. A question arises as to what Current account transactions are by and about an unregistered FIRM, AOP or BOI or large freely permitted, a lot of restrictions are say HUF that recquires no registration? placed on Capital Account transactions to be Whether they would be out of the purview entered into by Indian residents. Therefore, of FEMA, although they are included in the treating such entities as residents in India definition of person. Here, too, the outcome would pose several unforeseen difficulties. seems to be unintended. In order to make Consider the following illustrations FEMA workable, it is advisable to consider An Indian Company sets up a branch in that FEMA is applicable to such entities. USA. Such a branch cannot carry out following transactions without RBI’s prior Clause (iii) approval (the list is just illustrative) This clause provides that an office, branch or agency in India owned or controlled by a i Purchase of any premises (although US person resident outside India (PROI) is laws may be permitting it freely); 26
  33. 33. Important Concepts Under Foreign Exchange Management Act, 1999 ii Purchase of any capital assets; (dealing with various kinds of Bank (Vide Notification No. 47/2001-RB dtd. Accounts) defines the term “Non-Resident 5-12-2001, RBI has clarified that Indian (NRI)” to mean a person resident purchase or acquisition of office outside India who is either a citizen of India equipments and other assets required for or is a person of Indian origin. The term PIO normal business operations and other has been defined differently in different assets required for normal business Notifications and therefore, the term NRI in operations of an overseas branch/office/ turn will have a different meaning. In short, representative will not be deemed to be one should bear in mind that the definitions Capital Account transactions). of NRI and PIO are contextual. iii Borrow or lend money; “Person of Indian Origin” (PIO) (Vide Notification No. 67/2002-RB dtd. The term “Person of Indian Origin” (PIO) is 20-08-2002, RBI has permitted Indian defined differently in different Notifications Companies to grant rupee loans to their and therefore, the term NRI will have a employees, who are NRIs or PIOs). different meaning depending upon the iv Placement or acceptance of deposits. Notification one applies. Therefore, when It will thus be observed that this applying provisions of FEMA, one must be particular change in FEMA would result careful about the reference and context of in undue hardship as such entities will such application. have to comply with legal requirements Different definitions of the term PIO are as of two countries, namely, the “host follows:- country” (i.e. where they are operating) as well as the “ home country” (i.e. A. The term PIO as defined under India). Many a time, requirements in Notification No. 5 (dealing with various either country may be conflicting with kinds of Bank Accounts); Notification each other. No. 13 (dealing with Remittance of Assets) and Notification No. 20 (dealing Non- Resident Indian (NRI) with Inbound Investments including Section 2 of the FEMA deals with various Foreign Direct Investments (FDI) is as definitions. It defines person resident in India mentioned below: and a person resident outside India. “Person of Indian Origin” means a citizen However, it does not define the term non- of any country other than Bangladesh or resident nor it defines the term Non-resident Pakistan, if- Indian (NRI). i he at any time held Indian passport; However, Notification No. 5/2000-RB or 27
  34. 34. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians ii he or either of his parents or any of China, Iran, Nepal, Pakistan, or Sri Lanka his grandparents was a citizen of are excluded from the definition of PIO. India by virtue of the of the Constitution of India or the Overseas Corporate Body (OCB) Citizenship Act, 1955 ( 57 of 1955); Like the term NRI, the term “ Overseas or Corporate Body (OCB)” is also not defined B. The term is defined almost identically as in the Section 2, which deals with definitions above under the Notification No. 24 of various words/terms in general. (dealing with investment in Firm or Notification No. 5 (dealing with Bank Proprietary Concern in India) except Accounts) and Notification No. 20 (dealing that the citizens of Sri Lanka are also with Inbound Investments) define the term excluded from the definition in addition OCB in following manner. to citizens of Bangladesh or Pakistan as ‘Overseas Corporate Body (OCB)’ means a mentioned above. company, partnership firm, society and other C. The term PIO is defined in the following corporate body wholly owned, directly or manner in the Notification no. 21 indirectly, to the extent of at least sixty per (dealing with the Acquisition and cent by Non- Resident Indians and includes Transfer of Immovable Property In overseas trust in which not less than sixty per India): cent beneficial interest is held by Non- “Person of Indian Origin” means an Resident Indians, directly or indirectly but individual (not being a citizen of irrevocably. Afghanistan, Bangladesh, Bhutan, In order to establish that a particular entity China, Iran, Nepal, Pakistan, or Sri is an OCB, the investor has to furnish a Lanka) who - certificate in following forms from the i at any time held Indian passport; or Certified Public Accountant and/or ii who or either of whose father or Chartered Accountant of the country to whose grandfather was a citizen of which such entity belongs: India by virtue of the Constitution of However, RBI has issued Notification No. India or the Citizenship Act, 1955 101/2003-RB dated October 3, 2003 (57 of 1955).” whereby OCBs holding investments/ It will be thus seen that for the purposes of interests in India as on 16 th September acquisition or transfer of immovable property 2003 are derecognised as an eligible “class in India, persons of Indian origin who are of investors”. Now, OCBs which did not citizens of Afghanistan, Bangladesh, Bhutan, have any investments/interests in India 28
  35. 35. Important Concepts Under Foreign Exchange Management Act, 1999 prior to 16th September 2003 would be defined u/s 2(j) to mean “a transaction other treated on par with Foreign Companies. than a Capital Account transaction and without prejudice to the generality of the Current Account and Capital foregoing, such transaction includes:- Account Transactions 1. payments due in connection with foreign trade, other current business, services, Under the FERA regime the thrust was on and other short term banking credit regulation and control of the scarce foreign facilities in the ordinary course of exchange, whereas under the FEMA, business, emphasis is on management of foreign exchange resources. Thus, there is a clear 2. payments due as interest on loans and as shift in focus from control to management. net income from investments. Therefore, under FERA it was safe to 3. remittances for living expenses of presume that any transaction in foreign parents, spouse and children residing exchange or with non-resident was abroad, prohibited unless it was generally or specially 4. expenses in connection with foreign permitted. travel, education and medical care of FEMA has formally recognised the parents, spouse and children” distinction between Current Account and Capital Account Transactions. Two golden Explanation rules or principles in FEMA are mentioned As discussed earlier, this concept is unique to below:- FEMA and was not found in FERA. When H All Current Account transactions are it is said that Current Account transactions permitted unless otherwise prohibited: are free from controls in India, it does not and imply that any amount of remittance is H All Capital Account transactions are permitted for a Current Account prohibited unless otherwise permitted. transaction. Section 5 authorizes the Central Government to impose restrictions on Current Account Transactions Current Account transactions. Exercising India is signatory to the WTO Agreement. this authority, the Central Government has As a part of its obligation under the WTO issued Notification No. GSR 381(E) entitled Agreement, India has relaxed (not as the F.E.M (Current Account removed) its exchange control regulations Transactions) Rules, 2000 dated 3rd May on Current Account transactions. 2000, according to which drawal of foreign The term “ Current Account Transaction” is exchange is prohibited for: 29
  36. 36. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians 1. transactions specified in Schedule I, or 2. Remittance for securing Insurance for 2. travel to Nepal and /or Bhutan, or Health from a company abroad. 3. transactions with a person resident in 3. Short-term credit to overseas offices of Nepal or Bhutan. Indian companies. As far as categories (b) and (c) above are 4. Remittance for Advertisement on concerned, it may be noted that Indian rupee Foreign Television Channels. is a widely accepted currency in these 5. Remittance of Royalty and Payment of countries and hence, drawal of foreign Lump sum fee provided the payments are exchange is not permitted for travel to and in conformity with the norms as per item transactions with these countries. no. 8 of Schedule II, i.e. royalty does not Schedule II of the said Notification lists exceed 5% on local sales and 8% on transactions, which require prior approval of exports and lump-sum payment does not the Government of India, except when the exceed USD 2 million. exchange is drawn from RFC/EEFC, 6. Remittance for use of Trademark/ Accounts. Franchise in India. Schedule III of the said Notification lists It may be noted from the above that interest transactions, which require prior approval of and other income on investments are only the RBI. In some cases prior permission is covered as Current Account transactions. required only if the transaction value exceeds Therefore, the principal amount of the limits specified therein except where the investment can be remitted abroad, only if it exchange is drawn from RFC/ RFC (D) has been invested on repatriation basis. Any Accounts. Current Account transaction that is not regulated or prohibited is permitted by (Refer Annexure I of this Chapter for items implication. covered by Schedule I, II and III) Reserves Bank of India has liberalised the Capital Account Transactions remittances permissible under the Current Section 2(e) defines “Capital Account Account transactions vide Circular No. 76 Transactions” to mean “a transaction which dated February 24, 2004. Following alters the assets or liabilities, including transactions are permissible under the contingent liabilities, outside India of a automatic route without any monetary person resident in India or assets or liabilities ceiling:- in India of persons resident outside India, and 1. Remittance by Artistes, e.g. wrestler, includes transactions referred to in sub- dancer, entertainer, etc. section (3) of section 6.” [Refer Annexure 2 30
  37. 37. Important Concepts Under Foreign Exchange Management Act, 1999 for Capital Account Transactions specified in payment of cash or on normal credit terms Section 6 (3)]. of the vendor will be regarded as the Current Section 6 (3) contains ten sub clauses Account transaction. The importer may covering a wide range of transactions, capitalise it in his account books and claim namely, Foreign Direct Investments in India, depreciation thereon. As far as the country Overseas Direct Investments from India, is concerned, it is a trade transaction. Borrowing or Lending in foreign exchange However, if the same machinery is imported and in Indian rupees, various kinds of bank on deferred credit basis or is funded out of accounts, immovable property in India and ECB etc., the credit beyond twelve months abroad, guarantees, etc., for each category, (as less than twelve months again would fall the RBI has issued separate Notifications. within the definition of “Current Account transactions”) would result in the creation of Distinction Between Capital Account the long-term liability outside India and and Current Account Transactions therefore, be termed as a Capital Account The distinction between the two types of transaction. transactions needs to be understood from the A word of caution here is that, the meaning viewpoint of ‘balance of payments’ of the of “ alteration of assets or liabilities” is not country. There is a difference between our properly defined and therefore, leads to normal understanding of a “Capital Asset” or different interpretations. In order to be right a “Capital Expenditure” and a Capital side of the law. It is advised that in case of Account transaction per se. doubt, the matter may be referred to the For example, import of machinery on Reserve Bank of India. ■■ 31
  38. 38. Compendium on Policies, Incentives and Investment Opportunities for Overseas Indians Illustrative list of Current and Capital Account Transaction Nature of Transaction Current A/c Capital A/c 1 Import of Machinery If imported on If imported on Suppliers COD basis Credit or funded out of Foreign loans. 2 Import, Export of goods on Yes – Credit 3 Payment for Web hosting Yes – 4 Payment for consultancy Yes – 5 Remittance of - Interest on loans/ Investments Yes – - Dividend Yes – - rental from immovable property - Capital Gains on a) Movable Assets – Yes b) Immovable Property – Yes 6 Loans/Borrowings other than from banks(whether short term or Long term) – 7 Short Term Working Capital from Bank Yes – 8 Term Loan from Bank/F1 – Yes 9 Living Expenses of Parents, spouse & Children Yes – 10 Expenses in connection with foreign travel education and medical care of parents, spouse, children Yes – 11 Investments in Securities (whether in India by a non- resident or outside India by a resident) – Yes 12 Investments in Immovable Property(whether in India by a non-resident or outside India by a resident – Yes 32
  39. 39. Important Concepts Under Foreign Exchange Management Act, 1999 Foreign Direct Investment Annexure - I Schedule - I List of Current Account Transactions and Other Restrictions List of Current Account Transactions for 6. Payment of commission on exports under which Drawal of Foreign Exchange is not Rupee State Credit Route, except Permitted commission up to 10% of invoice value of exports of tea and coffee. 1. Remittance out of lottery winnings. 2. Remittance of income from racing/riding, 7. Payment related to “Call Back Services” etc., or any other hobby. of telephones. 3. Remittance for purchase of lottery 8. Remittance of interest income on funds tickets, banned/prescribed magazines, held in Non-Resident Special Rupee football pools, sweepstakes, etc. Scheme A/c. 4. Payment of commission on exports made 9. Travel to Nepal and/or Bhutan towards equity investment in Joint 10. Transaction with a person resident in Ventures/Wholly Owned Subsidiaries Nepal and/or Bhutan (RBI has the power abroad of Indian companies. to relax this prohibition). 5. Remittance of dividend by any company 11. Remittance towards participation in to which the requirement of dividend lottery schemes involving money balancing is applicable (The condition of circulation or for securing prize money/ dividend balancing not applicable awards, etc. presently). 33