The Hindu Business Line : Tax on deposits a big blow, say NRIs

THE decision to tax interest on NRE deposits announced in the Union Budget has shocked NRIs in the UAE, with leaders of the expatriate community warning that it could lead to a huge outflow of NRI funds from India and curtail fresh investments in the coming months.

The Chairman of the Indian Business and Professional Council, Mr I. Hukkawala, told Business Line that while the new Budget was praiseworthy for its growth-oriented and rural sector-specific policies, it was a "big disappointment" for NRIs.

"We were aware since the RBI recommendation a few months ago, that such a decision was possible. We therefore went to New Delhi to make a strong representation to the Indian Government a month ago and a letter urging that the exemption of tax on NRE deposits be retained was made to Mr Jagdish Tytler. Unfortunately, the Government has gone ahead with the move to remove this exemption and it is upsetting," he said.

Mr Hukkawala said that the decision had no rationale and would have an adverse impact on the inflow of NRI funds to India and could lead to a big outflow of funds as NRIs would withdraw their deposits and place them in other non-taxable avenues in the Gulf or elsewhere.

The council is planning to send another representation in two days time to the Indian Government to reconsider this move prior to the Bill becoming an Act.

"I am not sure what response we will get, but we are going to continue with representations regarding this, and also regarding the term period for tax exemptions on NRI deposits, once NRIs return home for good," he said.

He indicated that a majority of the NRIs in the Gulf countries in particular, were middle- and small-income earners and deposits in India was their major form of savings.

Mr B.R. Shetty, Vice-Chairman and Managing Director of the NMC Group, said that the move ends a good era for NRIs and would definitely affect future investment patterns.

He lauded the two per cent cess on education and hoped that the funds raised would be allocated usefully to improve education among the poorer sections.

Mr K.V. Shamsudheen, Chairman, Pravasi Bandhu Welfare Trust and Director, Barjeel Geojit Securities LLC, said that the Budget was disappointing.

"The decision to tax interest on NRE deposits is a blow to NRIs which will lead to pulling back of huge foreign currency from India to other countries.

"The Finance Minister has also introduced a special investment scheme for senior citizens with 9 per cent return, which must be extended to middle income NRIs that will help them in rehabilitation when they return to settle permanently in India. We have been demanding that such a scheme be implemented.

"The abolishment of long-term capital gains tax and reduction of short-term capital gain tax to 10 per cent is a great advantage to capital market investors in India," he added.

Mr Sudhir Shetty, General Manager, UAE Exchange Centre, pointed out that with interest rates on NRE deposits reaching rock-bottom (barely over two per cent for one year), a tax of 30 per cent on interest rates would not appeal to NRI investors.

"The tax-free aspect was the major attraction as interest rates are low everywhere. Now NRIs will look for other tax-free investments or other options abroad," he said.

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Tax on deposits a big blow, say NRIs