The Hindu Business Line : Tax on NRI deposits may hit inflow from Gulf

BANKERS in the UAE are expressing concern over the possible erosion of NRI deposits in the short and medium-term following the recent decision to tax interest on NRE deposits, even as the banks here are being flooded with enquiries by NRI customers seeking clarifications on the new tax regime.

The decision taken in the recent Indian Budget will definitely lead to a slowdown in fresh deposits and foreclosure of existing deposits, bank officials told Business Line.

"We have been receiving a lot of enquiries regarding the tax and some decision to recall deposits is also being made. There will be a negative impact on fund flows in the short and medium-term,'' said an official of the Abu Dhabi Commercial Bank.

The absence of clarifications on whether the tax will be imposed on a retrospective basis, or will be applied only to fresh deposits from September is causing a lot of concern among customers, he said.

"We have sought clarifications from India in this regard in view of large number of enquiries,'' the official said.

In the event that taxes will only be imposed on fresh deposits, the number of withdrawals and call back instructions may be reduced, but new deposits may slow down considerably. If the tax is retrospective in nature, it is likely to result in a large number of withdrawals, bankers said.

The impact will mostly be felt by the salaried NRIs who do not experiment with too many investment options and bank deposits have always held good as the safest way to channelise their funds, the bank official pointed out. Banks are hoping that the tax regime will not be fixed on a retrospective basis, as they may not be able to fulfil their contractual obligations regarding term deposits that were placed with them earlier, an official of an Indian bank said. The pace of funds flow by way of new deposits had already slowed down, he added.

Interestingly, though the overall interest rates had fallen last year, NRE and FCNR deposits had grown, according to bankers, due to the fact that interest rates were still attractive and the absence of taxes had induced NRIs to keep their money in Indian deposits. NRI remittances from the Gulf region by way of deposits and other fund flows are estimated to be to the tune of $12 billion last year. Indicators point to a diversion of NRI funds to the capital market, real estate and other viable options in the coming months.

Mr K.V. Shamsudheen, Director, Barjeel Geojit Securities, LLC, said that there is a visible increase in interest being shown by NRIs in the capital market in the past few days.

"New clients are opening accounts and there are lot of enquiries regarding various instruments. The exemption of capital gains tax on long-term funds and the relatively low tax on short-term instruments makes the capital market a more suitable option for NRIs, in view of the huge loss they may incur by way of tax on NRE deposits,'' he said.

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