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Tax department's demand to disclose foreign bank accounts sends NRIs, expats into tizzy

As the July 31 deadline for filing tax return nears, many non-resident Indians (NRIs), expats, as well as foreigners with investments in private equity and hedge funds here are puzzled by the strange new demand from the Indian tax office asking them to disclose their bank accounts held across the world. 
Neither can they figure out the reason nor are they comfortable with sharing details of offshore accounts with the income-tax department which cannot tax earnings from such assetsTax practitioners and lawyers are inundated with phone calls from these individuals who fear non-disclosure could put them on the wrong side of Indian regulations. 
Leading law firm Khaitan & Co is among those that have drawn the attention of Central Board of Direct Taxes, the apex tax authority, to the additional reporting requirement that has crept into the tax return forms. With the government refusing to spell out whether it has been inadvertently or intentionally inserted into the forms, NRIs and foreigners who file tax returns in India are interpreting the matter in different ways. 
Some are paying tax but not filing return — hoping the government would soon clear the fog; many are submitting returns without disclosing their global bank accounts — preferring to revise the return later if the government sticks to the demand. 
Some are reporting just one foreign or Indian bank account to collect tax refund. And many are choosing not to upload their returns till the last day. 
“There have been several representations. This new requirement is not only extra but also devoid of any statutory provision. A compliance measure which does not have any logical explanation would not only lead to compliance indiscipline but would also discourage foreign investments into the country. The government should clarify soon so that tax returns are filed in time,” said Bijal Ajinkya, partner at Khaitan & Co. 
Income of non-residents earned outside India is not taxable in India. In order to avoid tax on such overseas earnings, many Indians — at least one member of most business families — become NRIs by staying abroad for 182 days every year. However, the tax office probably suspects that such a law has been misused to legitimise black money parked abroad in tax haven banks. Untaxed money sent overseas through irregular hawala channels or part of export proceeds which are diverted to overseas bank accounts instead of bringing it back may have been laundered with NRIs claiming such funds are legitimate overseas earnings. 
While the I-T department may well have been driven by such suspicions, many fear endless queries by tax assessing officers. “One can upload the return even if you do not disclose foreign accounts but report one Indian bank account. Those doing this believe this will not have any consequences as the income credited in a foreign account is not taxed here. However, foreigners who invest in India through alternative investment funds (private equity or hedge funds) or other permissible routes and whose income is liable to attract income tax in India, will have to disclose their bank accounts in different parts of the world. If they do not have any account in India, then they cannot upload return without disclosing their foreign bank account,” said senior chartered accountant Dilip Lakhani. 
According to Mitil Chokshi, senior partner at Chokshi & Chokshi, since AIFs of category I and II have ‘passthrough’ income, which means it passes over to the ultimate investor, any income therefrom is chargeable to income tax in the hands of the investor. If the said investor is an NRI or foreigner, he should be required to file tax return in India. 
More than 50 NRI clients of Rajesh M Kayal, a Mumbai-based chartered accountant, are unwilling to share their overseas bank account details. “This disclosure required in tax return is inconsistent with tax provision,” said Kayal. 
Two years ago, the government directed all resident Indians to disclose their offshore bank accounts — a fallout of the glare on tax havens and data leaks that revealed hundreds of Indians with undisclosed bank accounts abroad. 
But NRIs were not covered by this directive. Now, the questions are: Will this change? Can it be pushed through without changing the law? 
The Economic Times, New Delhi, 24th July 2017


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