S. Srinath

With tax exemptions for NRIs withdrawn, it may not be worth remitting funds in India.

THIS year's Budget has some measures with significant implications but that went largely unnoticed. For example, the withdrawal of interest concessions on NRI deposits, which will lose their privileged status from October 1, and the interest on such deposits will be treated as normal deposits for both NRI and not ordinarily resident (NOR). There has been a cry that with the opening up of the economy and the free flow of forex into the country, NRI deposits are becoming less attractive.

It should be remembered that the interest rates on NRI deposits are very low at 1.75-2 per cent, whereas that on rupee deposits fetch 5.5-6 per cent. While withdrawing the existing 6.5 per cent tax-free RBI bond, the Finance Minister has introduced 9 per cent taxable bonds for senior citizens. But while removing the tax-free interest status on NRI deposits, no such matching concessions were offered.

Probably, the Finance Minister feels that the exchange gain would more than compensate the tax loss. But, again, keeping the exchange rate stable is one of the functions of the Finance Minister. Then, NRI deposits are also in Indian currency and the question of profit on exchange fluctuations does not arise.

While the Finance Minister rushed to withdraw the concessions on NRI deposits, he has not mentioned anything about the interest rates on NRI deposits. These are normally from remittances by middle-class expatriates who have taken up employment outside the country — asin West Asia or Africa.Another question that arises is, when these interest accruals become taxable, how are the returns going to be filed by the NRIs?

Will the banks be filing them on their behalf, and what happens if an NRI has deposits in more that one bank? Further, many do not even have a PAN card.

The economic impact must be studied as remittances by Indian expatriates were mainly due to tax concessions. Now, with these exemptions withdrawn without a matching hike in interest rates, it may not be worth remitting funds in India and getting caught in the tax net. At least, the existing deposits could have been left untouched, as they were made with the concessions in view.

Tonnage tax

Even the tonnage tax has not been addressed from a broad angle. The newly-introduced Section 115VP of the Income-Tax under Chapter XII - G lays down the procedure for the tonnage tax scheme. But by withdrawing Section 33 AC from April 1, 2005, companies will be forced into this option. There is also no guarantee that there will be no upward revision in tonnage rates.

Again, by withdrawing Section 33 AC of the IT Act, the dredging companies have been left high and dry andcannot create the Shipping Reserve to take advantage of the tax benefits to expand their infrastructure.

This does not point to a growth-oriented Budget. It is unfortunate that the dredging companies, including the Dredging Corporation of India, are to be brought into normal corporate tax regime, affecting their capital investment plans.

Infrastructure

Paragraph 47 of the Budget speech states that sustainable growth depends on the availability of efficient infrastructure and that the Government is committed to removing the inadequacies in infrastructure facilities through a mix of policy and fiscal measures.

Towards this end, one would expect a stable tax regime withwell-conceived measures to promote infrastructure. Tinkering with the provisions and makingamendments could affect further investment in this vital sector.

Keeping this in mind, Section 10(23G) was introduced to encourage private participation in the much-needed infrastructure by granting exemption from long-term capital gains, dividends and interest on long-term loans. With the withdrawal of exemption available under Section 10(23G) of the Income-TaxAct, foreign investment coming through Mauritius can get full tax exemption but not domestic investment.

This needs an analysis in the light of the efforts by the Finance Minister to remove the inequities posed by the withdrawal of the long-term capital gains tax and replacing it with transaction tax.

Savings

A mention must be made of the film industry where the circulation of undisclosed money is high. This is due to the fact that income in this business, for everyone, may be regular and, hence, each tries to hide it and circulate it in the unreliable money-lending activities.

The voluntary disclosure scheme has had a very little impact and has not arrested the situation.

Hence, another sop can be provided to artists by way of tax-free savings bonds where excess monies can be parked at a very low rate of interest by granting full deduction from IT, which can later on be taxed when withdrawals takes place at the prevailing tax rates.

These issues need to be addressed before rather than bemade part of the post-Budget discussions.

Other issues, such as transaction tax and FDI limits on insurance that have taken the limelight with political and economic overtones, confirm that the pre-Budget meetings the Finance Minister held with various pressure groups were not adequate.

(The author is a Chennai-based chartered accountant.)

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