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New Tax Legislation to Help NRIs

The government also said that with the new foreign investment regulations the economy would regain and sustain GDP growth rates of about 9 per cent in the fiscal 2010-11.

The government said it was time to hasten policy reforms in areas that include taxation and foreign investment regulations. Finance minister Pranab Mukherjee in his budget address to parliament said there was an urgent need to consider reforms to address a number of cross-border tax issues faced by taxpayers.

He said the government also wanted to make the policy in this regard user-friendly by consolidating all prior regulations and guidelines into one comprehensive document. This, he said, would enhance clarity and predictability of the country’s Foreign Direct Investment policy for foreign investors. “We have decided to give due consideration to reforming the international tax system in the budget,” he said.

It is believed that for long the Indian outbound investors faced difficulty in claiming credits for foreign taxes. Tax treaties provide a general rule that taxes paid by an NRI abroad, in accordance with treaty provisions, should be eligible for foreign tax credits, or FTC. Explicit rules for applying this principle are left to the domestic tax legislation.

The government admitted that in the absence of any specific provisions in the tax laws, a number of technical and practical issues arise and, henceforth, the lack of a well-defined FTC system results in risk of double taxation on income arising from the outbound investment. The Vijay Mathur Committee on Non-resident Taxation had highlighted the need for introducing comprehensive FTC guidelines in 2003.

The committee had also proposed underlying tax credit provisions and had said that by introducing these provisions an impetus to outbound investments can be provided. Mukherjee announced to provide considerable relief to income tax payers by raising the slabs at two levels; this includes the Indian citizens as well as the NRIs. To encourage NRIs to place their money with banks in India, the government sought lowering of the Tax Deducted at Source, or TDS, rate on interest earned on NRI deposits under section 115E to 10 per cent from 20 per cent. The TDS rate applicable on NRI deposits with a foreign bank which is currently at 30 per cent is also being brought on par with that for Indian banks.

Also as a data sharing initiative on the terror prevention measures, the government is already co-ordinating with many foreign countries, including the UAE, to collect the income data of its citizens. The NRIs will have to submit the proof of the income in the form of tax fillings etc, if any, as per the rules in their host nation.

The existing limit of Rs100,000 on tax saving has been raised by an additional amount of Rs20,000 for investment in long term infrastructure bonds as notified by the government. Contributions to the Central Government Health Scheme have also been allowed as deductions within the overall ceiling for tax rebate, besides contributions to health insurance schemes which are currently allowed as deductions under the Income Tax Act.

The basic threshold limit for income tax exemption will remain at Rs160,000. Under the new proposal, 10 per cent tax will be levied between Rs160,001 and Rs500,000; 20 per cent on incomes between Rs500,001 and Rs800,000 and 30 per cent for above Rs800,000.

Mukherjee said that rate of tax on services will be retained at 10 per cent to pave the way forward for Goods and Services Tax, or GST. He added that all services are not being brought under service tax at this stage but announced that certain services hitherto untaxed would be brought within the purview of service tax levy.

The finance minister said the service tax net is being expanded to include domestic and international air journeys of all classes, health check-up undertaken by hospitals for employees of business entities and health services provided under health insurance schemes offered by insurance companies. The new proposal relating to service taxes are estimated to result in a new revenue gain of $650 million.

The finance minister said that certain legislative changes are proposed to be made to plug revenue leakages and to remove distortions.

Mukherjee said that the rate reduction in central excise duties is being partially rolled back and the standard rate on all non-petroleum products was being enhanced from 8 per cent to 10 per cent ad valorem. The ad valorem component of excise duty on large cars, multi-utility vehicles and sports-utility vehicles which was reduced as part of the first stimulus package is being increased by 2 per cent points to 22 per cent. The basic duty of 5 per cent on crude petroleum, 7.5 per cent on diesel and petrol and 10 per cent on other refined products has also been restored.

Central excise duty on petrol and diesel has been enhanced by Rupee One per litre each. Some structural changes in the excise duty on cigarettes, cigars and cigarillos have been made coupled with some increase in rates. Excise duty on all non-smoking tobaccos has been enhanced.

ravi@khaleejtimes.com