RIYADH, 4 June 2004 — News that the Reserve Bank of India (RBI) has proposed to tax the income from deposits by non-resident Indians has stirred up a hornet’s nest among Gulf Indians, who make up the bulk of overseas depositors.

Gulf NRIs had high hopes for the new Indian government and many now say they are already disappointed.

The majority of Indians in the region save with some difficulty as they are laborers with an average income of no more than $300 a month.

Gulf NRIs contribute significantly to India’s foreign currency reserves, which are at an all-time high. Last year alone, out of $20 billion remitted by Indians from all over the world, 75 percent came from Gulf Indians.

NRIs are upset by an argument by a RBI panel that because of the comfortable forex reserves the country enjoys because of their contribution, there is no need to give concessions to NRIs.

NRIs so far enjoyed tax benefits because the government wanted to woo their deposits. Now that it has them — with reserves topping $120 billion — some feel it is letting them down.

Reasons given include the need to tax NRI deposits on a par with domestic deposits to be consistent with current account convertibility. Whatever the official line, NRIs feel that they were used during the crisis but are now being told to take their money elsewhere.

“I live a simple life, control my expenditure to save from my salary in the hope that whatever I deposit back home will take care of my retirement,” says a Riyadh-based Indian. “Already, I am a victim of low interest rates like thousands of others. The imposition of such a tax on my deposit will definitely spoil my plans.”

In the past NRIs overwhelmingly responded to government calls to invest in India Development Bonds, Resurgent India Bonds and India Millennium Bonds. Now, if the government goes ahead with the proposal to tax NRI deposit income, a sizable number of Indians living overseas say they will think twice before investing in India.

Another complicating factor is filing of tax returns and the administrative costs involved if the government accepts the RBI proposal. Many Indian workers in the Gulf are illiterate and are not used to filing tax returns. The RBI is setting itself up for an administrative nightmare.

Indian banks are flush with cash. With so much development work needing to be done, NRIs say now is not the time to alienate them.