The Hindu Business Line : Tax spectre causes flight of NRI deposits

WITH less than a month to go before the tax on NRI deposits comes into force, some banks have reported steep erosion in the corpus of NRI deposits held in the country.

Confirming the trend, Mr K.P. Padmakumar, Chairman of Federal Bank, said: "This is a very recent phenomenon and it is confined more to the high net worth individuals. And even among them, the fear is more against coming under the scrutiny of the Government tax apparatus rather than against the tax itself."

While the high net worth individuals have already started withdrawing and re-deploying their funds abroad, there is even greater confusion among the average and the poorer class of NRIs, Mr K.V. Shamsudheen, Chairman of the Dubai-based Pravasi Bandhu Welfare Trust, said on a visit to Kerala. Leaving aside the top 10 per cent of the high net worth individuals, he said that the average deposit of an NRI would work around Rs 5 lakh and it is not an amount that should be taxed.

Some bankers confirmed that the average deposit base of an NRI would be around the same figure, though with a slight upward bias.

With a rate of interest rate of close to three per cent for an average NRI deposit, the interest income would be close to Rs 15,000 per year - an amount, which would not be taxable for a resident Indian.

The returns that would accrue to the Government would not be sufficient to justify the effort for such an exercise and would eventually precipitate in a reverse flow of capital, Mr Shamsudheen warned.

There is still no direction from the Finance Ministry and confusion prevails among the bankers as to how the tax will be imposed. "If it is mandatorily taxed at the source, very few NRIs would want to file an income-tax return given that they would not want to become a part of the Indian tax system. Instead, most would eventually redeploy these resources overseas. Post-tax, the returns from India and those prevalent abroad would not be very different," Mr Shamsudheen said.

It is still uncertain whether the tax will be deducted at source, as is already the case with NRO accounts or whether a submission that the interest income falls below the individual tax limit will ensure that there is no deduction at source.

Given the weak trends in the Indian currency and the surge in inflationary spiral, some bankers felt that the low rate of interest, virtually half of what is obtaining for resident Indians, should itself be perceived as a tax and no fresh imposts should be levied for NRIs.

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