RIYADH, 1 September 2004 — It was good news for millions of Indians residing in the Gulf that the Indian government has at last withdrawn the proposed tax on deposits made by NRIs for the fiscal year 2004-05.
The gesture benefits non-resident Indians in the Gulf more than their compatriots in the West as they make significant contribution to India’s foreign currency reserves but earn no more that $300 per month on an average.
Last year alone, the contribution of Gulf NRIs was to the extent of 75 percent out of $20 billion remitted to India by overseas Indians. However, the NRIs are not entirely happy since New Delhi has merely postponed the tax till April 1, 2005.
“Of course, the temporary withdrawal in itself is a positive step and we hope that the tax would be totally abolished once the new finance minister reviews the entire issue in the months to come,” said an NRI based in Riyadh.
Except for their earnings in India, the NRIs had never paid tax on their deposits made with Indian banks either in rupee or any other foreign currency. It was a big shock to them when they learnt earlier this year that the Reserve Bank of India had made a proposal to tax the income accrued from deposits made by NRIs through Non Resident External Rupee Account (NRE), Foreign Currency Non-Resident Account (FCNR) and RFC. The RFC is foreign currency bank account for those returning to India for permanent settlement. Based on RBI’s recommendation, the new government imposed tax on NRI deposits amidst heavy protests from NRIs. The NRIs were told that the interest earned on their deposits would be subject to TDS (tax deducted at source) with effect from Sept. 1, 2004.
This tax proposal hurt the investor confidence making a mockery of a separate ministry created by the new government to look after NRI interests.
The NRIs thought that this new creation was mere lip service even as the ministry was struggling to find a place and staff in New Delhi. Consequently, a large number of NRIs withdrew their deposits and started investing in growing opportunities in the Middle East and elsewhere. “As it is, interest rates have hit rock bottom. Imposing tax in such a situation wasn’t a friendly gesture,” points out another expatriate Indian.
There is another angle to this. Inflation in India has seen an unprecedented upward trend in recent times. It is currently at a 42-month high — hovering around eight percent.