Banks can't offer investment advisory

Dubai - Many banks in India are pestering customers asking them to invest in mutual funds

Q: I want my son who is in India to start a business which I will join next year upon my return. I am told that some states in India are having investor-friendly processes for new businesses. I need some guidance in this regard.
- P.K. Malhotra, Doha
A: Ten states of India, notably Maharashtra, Tamil Nadu, Uttar Pradesh and West Bengal, are expected to join a one-stop clearance platform where 26 services will be given online clearances. The ministry of corporate affairs now registers companies in one day and the same facility is available for limited liability partnership firms. The labour ministry also has a facility for online approval under three labour laws.
This online focus is part of the larger attempt to improve India's ranking among nations in respect of the ease of doing business criteria. The central government has prepared 340 parameters for state governments to improve their business ranking. Currently, India ranks 130 among nations and the government wants to get into the top 50 by 2018 in order to attract foreign investors.
Q: Many banks in India are pestering customers asking them to invest in mutual funds, shares, bonds and other financial products, specially depositors who have large funds lying in the banks. Should banks be doing this? Is there no restriction on such activity?
- K.S. Rungta, Manama
A: The Reserve Bank of India has recently issued guidelines pertaining to investment advisory services offered by banks. There is a conflict of interest between the investment advisory services and marketing services of banks for mobilising deposits. Investment advisory services are regulated by the Securities & Exchange Board of India and entities which provide these services need to be registered with Sebi.
The RBI notification dated April 21, 2016 has advised that hereafter banks should not undertake investment advisory services departmentally. Banks which wish to offer these services may do so either through a separate subsidiary or by using an existing subsidiary. Further, it has to be ensured that there is an arm's length relationship between the bank and its subsidiary. It is also provided under the guidelines that the bank should obtain prior approval of the RBI's department of banking regulation before offering the investment advisory services through an existing subsidiary or before setting up a subsidiary for this purpose.
Q: Many resident Indians who have investments outside India pursuant to the liberalised remittance scheme are paying tax in the foreign country where the income is earned. Are they also liable to pay tax in India on the same income? If so, would they be entitled to any tax credit for the tax paid outside India?
- P.B. Basu, Sharjah
A: A resident Indian is liable to pay tax in India on his world income. Therefore, if he has income outside India from any assets located there, be it rental income, interest on bonds and securities, dividends on shares, etc., he is required to pay tax in India on the aggregate amount of his foreign and Indian income. However, a foreign tax credit would be allowed in respect of the tax paid in the foreign country from the total tax payable in India. Such foreign tax will be allowed as a credit only against the income tax, surcharge and cess payable under the Indian law. The foreign tax paid cannot be set off against interest or penalty levied under the Indian law.
The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policy.