Taxpayers’ dilemma: conflicts between tax legal guidelines and Fema

As a resident taxpayer, one not solely has to adjust to home tax legal guidelines, but in addition alternate management laws beneath the Foreign Exchange Management Act (Fema). The provisions of each legal guidelines are sometimes conflicting on sure transactions. One such state of affairs is the place you should assist a non-resident pal or relative who’s going by means of a monetary disaster. But what are the principles that you should know earlier than sending a mortgage or a present?

Under the Liberalised Remittance Scheme (LRS) of Fema, throughout the $250,000 annual restrict, you may give a overseas foreign money mortgage solely to a relative as outlined beneath the Companies Act. This definition solely covers fast kinfolk, i.e. dad and mom, grandparents, and siblings, kids, grandchildren and their spouses. Therefore, you may’t give such a mortgage to an uncle or aunt, or to a cousin or shut pal. Under Fema, help in such method is totally dominated out.

Can you as a substitute give them a present? Under LRS, you’re permitted to offer a present to any non-resident. So, is that the answer? Unfortunately, that is the place the tax legal guidelines complicate the difficulty. From 2019 onwards, any present obtained by a non-resident from a resident is deemed to accrue or come up in India, and is due to this fact thought-about as a part of the non-resident’s taxable revenue in India.

The present obtained by the non-resident is taxable in India, until it falls beneath the exemption out there for items to kinfolk. Here, the definition of kinfolk creates an issue. Friends and cousins are usually not kinfolk as per this definition. Even an uncle and aunt are usually not a relative of the particular person making the present, although the nephew is a relative of the uncle or aunt. This is actually baffling! How can the connection be just one means and never the opposite?

So, the recipient of the present (uncle/aunt/cousin or pal) could be liable to pay tax in India on the present quantity. You may assume that tax is their downside – let me simply give the present and be carried out with it! Unfortunately, you can’t get away so simply. Under the legislation, you’re required to deduct tax at supply on such present at 30% plus surcharge and cess, and pay it to the federal government.

This tax largely defeats the entire goal of aiding that particular person—to assist him out with $10,000, as an example. To make sure that all the quantity reaches him web of tax, you would wish to gross it up contemplating $10,000 because the post-tax quantity, pay about $5,000 by means of tax, after which remit the stability $10,000.

Of course, if the recipient of the present is ready to procure a Tax Residency Certificate from the tax authorities of his nation of residence, the advantages of the double taxation avoidance settlement (tax treaty) of that nation with India might present exemption for such an revenue in India.

Take one other occasion, which entails abroad tax. You want to purchase overseas securities, however are suggested to arrange an organization in a tax haven, and purchase the securities within the title of the corporate, to make sure that your heirs don’t find yourself paying inheritance tax within the nation the place the securities are held. Easier mentioned than carried out! While overseas alternate legal guidelines allow you to amass securities overseas as portfolio funding, you can’t arrange a overseas firm to hold out this exercise. You might due to this fact need to danger an publicity to inheritance tax within the overseas jurisdiction by buying the securities in your personal title.

An analogous state of affairs arises in relation to acquisition of abroad actual property, whereby Fema provisions—prohibiting establishing of corporations to carry actual property—work counter to the pursuits of its residents, who might find yourself paying inheritance tax to a overseas nation.

One wonders whether or not such confusion will be averted, with the legislation framed such that real transactions are facilitated by harmonization of the provisions of tax and Fema. Unfortunately, every regulator seems on the legislation from its personal perspective and frames provisions accordingly. A consolidated relook at among the overseas alternate provisions and revenue tax provisions relevant to people could be the want of the hour.

Gautam Nayak is associate at CNK & Associates LLP.

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