India Business
Budget: NRI investors to get lower returns
Mar 4, 2007 - 10:15:38 AM

India's latest budget has little to offer to NRI investors. If anything, the tax burden on them has only gone up.

More Indians are paying more taxes, the economy is growing at over nine percent, exports are booming and foreign reserves have touched a new record of $180 billion. So Finance Minister P. Chidambaram focused on the poor to lower prices, provide better education and healthcare, offer selected insurance cover and improve infrastructure.

Now that foreign companies are rushing to India and Indian companies are buying out foreign companies, new investment incentives take a back seat. Thus it is no wonder the budget did not have any special provisions to attract NRI investors. However, NRIs, like all Indians, will pay less income tax but also get lower returns on Indian stocks.

NRIs who file income tax returns in India will benefit marginally as the tax exemption has been raised by Rs.10,000 to Rs.110,000; to Rs 145,000 for women and Rs.195,000 for senior citizens. However, the education cess has increased from two percent to three percent on all direct and indirect taxes to finance higher education.

NRIs will get lower returns from their investments in stocks. The budget raised the dividend distribution tax from 12.5 to 15 percent on dividends paid by a domestic company from April 1, 2007. When the education cess of three percent is added, it amounts to over 18 percent. This means the dividend is reduced by over 18 percent on Indian stocks. Similarly, NRIs investing in a money market mutual fund or a liquid fund would pay 25 percent dividend distribution tax. But not many NRIs invest in these very short-term funds and the return is negligible.

NRI tenants occupying any property for commercial use will now have to pay service tax of 12.5 percent. This increases their cost of doing business in India. NRI landlords will not be affected, as they will collect this service tax from their tenants.

The budget did not make any provisions for greater individual real estate investment. To attract NRIs to invest in real estate, the stamp duty should be uniform across the country and reduced considerably. NRIs remit funds through legitimate banking channels and so they are at a disadvantage when the seller demands the majority of the price in cash as the sale price is a fraction of the total price paid for a property. This will bring down, if not stop, cash changing hands when buying and selling property that is commanding steep prices in India today. Since this is not strictly a budgetary provision, the finance minister can issue guidelines to the state governments on this matter.

As avid collectors of Indian art, if NRIs sell their art pieces in India, they will have to pay a capital gains tax. An NRI selling any work of art in India including drawings, paintings, sculptures or archaeological collections will now pay capital gains tax of 20 percent on the net gains or 10 percent on the total price.

NRI promoters can enjoy a five-year tax holiday if they invest in economy hotels and convention centres in and around Delhi provided that these facilities are completed before March 2010 in time for the Commonwealth Games in the capital.

NRI financiers of venture capital funds in India enjoyed tax benefits known as Pass Through Status for all knowledge-intensive ventures. Now the NRI promoters of these venture capital funds will get tax exemptions only in 'truly deserving' ventures such as in biotechnology, IT relating to hardware and software development, nanotechnology, seed research and development, research and development of new chemical entities in the pharmaceutical sector, dairy industry, poultry industry and production of bio-fuels.

NRI promoters may also be taxed depending on their country of residence and its tax treaties with India. If an NRI takes over an infrastructure company through merger or acquisition, he/she will lose the exemption benefit granted earlier.

In addition to their bank accounts in major cities with major banks, NRIs can now open NRE/FCNR deposit accounts in selected foreign currencies or in rupees with Regional Rural Banks that are making good progress.

NRIs can heave a sigh of relief that their cash withdrawals under Rs.50,000 will not be notified to the authorities. To keep track of cash transactions and 'black money', a banking cash transaction tax was introduced last year for all cash withdrawals above Rs.25,000 and these transactions were reported to the Financial Intelligence Unit. This led the Income Tax Department to many money-laundering and 'hawala' transactions. This year, the limit of withdrawals has been raised to Rs.50,000.

The budget follows the old saying, 'If it's working, don't fix it'. India is progressing well so the poor should benefit. And NRIs are welcome to contribute - without VIP treatment.


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