Interest on NRE accounts is tax-free, but the I-T department creates hurdles to tax these accounts
Indians who work abroad invest their money back home. In fact, these remittances from non-resident Indians (NRIs) have allowed us to bridge the foreign exchange deficit caused by our unbridled love for gold. On its part, the government has also ensured that its remittance and tax laws facilitate investments in India.
Investments made from non-resident external (NRE) accounts are fully repatriable. Interest on NRE accounts is also tax-free. NRIs have responded with remittances of Rs 3,50,000 Crore ($48 billion) last year. However, the income tax (I-T) department creates many hurdles in taxing the remittances made to Indian NRE accounts on technical grounds. While some NRIs have access to professional advice and can avoid these, most others are caught.
Consider the curious case of merchant navy personnel (called shippies in local jargon). They serve on Indian and foreign ships in international waters and are usually away for more than six months in a year. They are classified as non-residents under the Income Tax Act.
In most cases, they have no residence anywhere else in the world other than India. They are entitled to dollar salaries, which is paid to them from abroad into any bank account anywhere in the world. Most of the shippies want to invest in India and direct their employers to remit the monies to their NRE accounts maintained in India. The investments are then made from these NRE accounts.
The I-T department has been trying to tax these amounts for many years now on many technical grounds. One of the most ludicrous was relating to shippies serving on Indian ships in international waters. The argument given was that under the Merchant Navy Act any Indian ship is considered a part of India and hence, the person serving on board has technically never left India and is Indian resident. Fortunately, the Central Board of Direct Taxes came out with a clarification negating this hyper-technical argument. But the I-T department is not done as yet. The new argument, now, is that those shippies who want to get their monies directly into their Indian NRE accounts will still have to pay tax as the income is received in India.
The shippies can open a bank account in a tax friendly jurisdiction (say Dubai) and then remit the money from that intermediate account to their Indian NRE account. In that case, Indian income tax just cannot be levied even according to the hyper technical argument. In short, the I-T department is forcing Indian shippies to open bank accounts in foreign centres (which is perfectly legal for them to do anyway). Discussions with them reveal that none of their colleagues from countries such as China, Philippines, etc who are following similar routes to get their salaries are subject to tax in their home countries.
Beside shippies, Indians working in countries with foreign currency restrictions, such as countries in Africa, face a similar problem as many ask their employers to remit these monies directly into their Indian NRE accounts. They face the same issues.
The finance minister, in 2015, had retrospectively amended the definition of what constitutes time spent in India. Yet the tax department is proceeding against this intent by raising hyper-technical arguments. This is a fit case where a quick clarification should clear the air. If that does not happen, banks in countries such as Dubai should look forward to a bonanza from Indian NRIs soon.