Taxpayers’ Dilemma: Conflict Between Tax Laws and FEMA

Under the Liberalized Remittance Scheme (LRS) of FEMA, you can give foreign currency loan only to a relative as defined under the Companies Act, within the annual limit of $250,000. This definition includes only close relatives, ie parents, grandparents and siblings, children, grandchildren and their spouses. Therefore, you cannot give such a loan to an uncle or aunt, or a cousin or close friend. Under FEMA, assistance in this way is totally prohibited.

Can you gift them instead? Under the LRS, you are allowed to make a gift to a non-resident. So, is this the solution? Unfortunately, this is where tax laws complicate the issue. From 2019 onwards, any gift received by a non-resident from a resident is deemed to accrue or arise in India, and hence forms part of the non-resident’s taxable income in India.

Gift received by a non-resident is taxable in India, unless it is covered under the exemption available for gifts to relatives. Here the definition of kin creates a problem. According to this definition, friends and cousins ​​are not relatives. Even uncles and aunts are not relatives of the person making the gift, although a nephew is a relative of an uncle or aunt. This is really shocking! How can it be that the relationship is only one way and not the other way around?

So, the recipient of the gift (uncle/aunt/cousin or friend) will be liable to pay tax in India on the gift amount. You might think that taxes are their problem – let me just gift them and be done with it! Unfortunately, you can’t get away that easily. Under the law, you are required to deduct tax at source on such gift at 30% additional surcharge and cess and pay it to the government.

This tax largely defeats the whole purpose of helping that person – for example, helping him with $10,000. To be sure that the entire amount reaches him net of tax, you would have to gross it up, considering the $10,000 as an after-tax amount, pay about $5,000 by way of tax, and then The remaining $10,000 must be paid.

Of course, if the recipient of the gift is able to obtain a tax residence certificate from the tax authorities of the country of his residence, the benefits of that country’s Double Taxation Avoidance Agreement (tax treaty) with India may provide for such exemption. Can Income in India

Take another example, involving foreign taxes. You want to acquire foreign securities, but you are advised to set up a company in a tax haven, and acquire the securities in the name of the company, to ensure that your heirs do not pay inheritance tax in that country Where the securities are held. easier said than done! While foreign exchange laws allow you to acquire securities abroad as a portfolio investment, you cannot set up a foreign company to conduct this activity. Therefore, you may be exposed to the risk of inheritance tax in a foreign jurisdiction by holding securities in your name.

A similar situation arises with regard to the acquisition of foreign immovable property, wherein the FEMA provisions – prohibiting the setting up of companies to hold immovable property – work against the interests of its residents, who are liable to pay inheritance tax to a foreign country. can pay.

One may wonder whether such confusion can be avoided had the law been framed in such a way that the genuine transactions are facilitated by harmonizing the provisions of the tax and FEMA. Unfortunately, each regulator looks at the law from its own perspective and makes provisions accordingly. The need of the hour may be to take a consolidated look at certain foreign exchange provisions and income tax provisions applicable to individuals.

Gautam Nayak is a Partner at CNK & Associates LLP.