India's biggest hurdle in attracting NRI funds had always been repatriability. Though funds in NRE and FCNR had always been repatriable, there were several restrictions and conditions in transferring funds relating to other transactions like say sale of property, shares, inheritance money, etc.

With the government committed to liberalisation, gradually restrictions on repatriability were pared down.

A recent circular allows any NRI, PIO or foreign national to repatriate up to $1 million per calendar year out of the balances held in their NRO accounts. This basically means that for the Diaspora and (even for foreigners) the rupee is almost fully convertible.

However, there is a dark cloud to this silver lining. The authorities seem to have brought in this legislation in some kind of ill advised haste.

Some inconsistencies in the law have crept in and as the amounts involved are significant, the risk of litigation is large.

Already, one of my readers has written to me a rather enlightening letter exposing several practical difficulties in following the new requirements. Let us understand the background.

First, remittances are allowed provided the person making the remittance furnishes an undertaking in duplicate accompanied by a certificate from an accountant.

Way back in November 1997, CBDT issued a circular making it mandatory u/s 195 for any resident person deducting tax at source for making a foreign remittance to furnish a simple undertaking detailing the amounts to be remitted and the TDS thereon, accompanied with a certificate from a chartered accountant.

Simultaneously, RBI vide Circular 48 dated November 29, 1997 made it an additional requirement for NRIs too. At that time, just furnishing a simple undertaking along with a CA's certificate did not look very cumbersome.

So far so good. However, subsequently CBDT brought in substantial changes (expansions) to the original undertaking and the CA certificate through an order dated October 9, 2002.

CBDT found the original undertaking and the certificate wanting in so far as details of the remittances and TDS thereon are concerned. So new formats for the same were introduced. However, the new formats are almost impossible to comply with. Here's why.

So far, the remittances included --

• Business transactions representing income from royalties, technical services, supply of articles or things or computer software, etc., after applying TDS.
• Current account incomes like rent, dividend, interest etc., after deducting TDS.
• A few capital account transactions such as gifts, remittances for education of children, etc., which are tax neutral.

For most of these transactions, the remitter and the beneficiary were different persons. For example, in the case of say interest, the remitter happens to be a resident company and the beneficiary is the NRI investor.

The undertaking as worded envisages a person making a remittance to an NRI after TDS.

However, this is mostly not the case when forex is repatriated through balances held in NRO accounts. Now that the NRI has to submit the undertaking himself, the remitter and the beneficiary are the same!

Hence, no TDS is applicable, yet the new format of CA Certificate contains itemised details of TDS against the amount proposed to be remitted.

Take the case of a typical NRO account which would have some credits and debits. Each of the credit items would represent amounts which have already suffered TDS, unless, these are capital in nature. The debits (outflows) represent various investments in India.

More often than not it would not be possible to arrive at a one to one relationship with any one amount and the TDS paid thereon.

For, the one amount in question would have been built up over time and tax if any would have been paid at the appropriate juncture.

To put it differently, when the income did arise during the past years through sale of shares, debentures, immovable property etc., attracting capital gains tax and also by way of dividend, interest, salary, etc., attracting income tax, the returns would have been filed and assessment process completed.

Therefore, for those NRIs who have been filing returns regularly, it would make abundant sense to allow the repatriation from NRO accounts up to the permitted ceiling without the necessity of any undertaking or certificate.

It is a pity that RBI and the CBDT fails to understand the difficulty in giving itemised details of TDS against the amount intended to be repatriated. Unless this difficulty is resolved, the circular becomes ipso facto ineffective.

My case does not rest here. The notification allows repatriability within this overall limit of $1 million, sale proceeds of immovable property, held by NRIs for a period of not less than 10 years, subject to payment of applicable taxes.

However, the time limit of 10 years is not applicable to the amount representing the sale proceeds of assets in India, acquired by way of inheritance/legacy.

Now, suppose an NRI sold inherited assets six years ago and properly paid the capital gains tax during the year of the sale. Does this circular give him a right to repatriate this amount today? It appears that the intention is positive in this matter.

However, instead of paying the tax had the legatee invested the sale proceeds in a house to save on capital gains and later sold the house, it seems the repatriability is lost.

Yet another instance. In respect of sale proceeds of immovable property, repatriation is allowed if the sale proceeds of the property were retained as deposits for a minimum period of 10 years cumulatively.

In other words, it is not mandatory to hold the property for all of 10 years; if the cumulative time that the property and the deposit was held is 10 years, then too, repatriation would be possible.

Now, like in the earlier instance, if the sale proceeds were invested in shares instead of being retained in the form of deposit, the right of repatriation is retained only if the investment can be traced to the sale proceeds of the immovable property. Now the moment such a rule is made, it becomes fraught with impracticality and subsequent difficulties for all concerned parties.

Postscript: On January 31, the RBI issued a fresh circular in this regard  with the objective of providing clarifications on various aspects relating to the criteria, purpose and ceiling for repatriation etc., in the case of remittance facilities for NRIs/PIOs.

However, the main issue regarding the undertaking and certificate has been left totally untouched.

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