$124 Million & Counting! How Indians Send Cash Abroad to Skip US Tax
$124 Million & Counting! How Indians Send Cash Abroad – What has caused the spurt in remittance? Tax experts suspect this could be an attempt to escape the American tax authorities.
There is a sudden, inexplicable surge in money that Indians are sending abroad for ” maintenance of close relatives”. Such fund transfers typically add up to $10-20 million a month. But in July 2015, according to the latest available data, total remittance under this head crossed $124 million.
Also, money remitted in July to students studying in foreign colleges and universities rose more than six times in one year to $113.9 million.
What has caused the spurt in remittance? Tax experts suspect this could be an attempt to escape the American tax authorities.
senior financial services professionals believe that a large part of fund flow — particularly, remittance to relatives — could have been triggered by US-based Indians trying to escape the American tax authorities.
Ever since the US government passed the Foreign Account Tax Compliance Act ( FATCA) to unearth black money of US residents outside the country, many Indians — who neither disclosed their bank accounts and investments in India nor intend to — have been trying to figure out ways to overcome the tax hurdle.
What has come in handy is the Reserve Bank of India’s liberalised remittance scheme (LRS) that allows a resident Indian to invest and transfer up to $250,000 a year. This is the window that several Indians in the US may be using in a roundabout way. First, they ‘gift’ their assets and investments here to ‘relatives’ (as defined under Indian income-tax law) who are staying in India. Being gifts, such transfers are tax-free in the hands of those who receive them. The second leg of the transaction involves these local residents in India remitting the amounts received as gifts back to their NRI (non-resident Indian) family members using LRS.
“Since this is shown as fund for maintenance, people of Indian origin in the US, to whom the money is remitted, pay no tax. Such transfers take place in tranches,” said an expert on FEMA (Foreign Exchange Management Act), requesting anonymity.
Dilip Lakhani, a senior chartered accountant, “Resident Indians have to mention in their income-tax returns any investment through LRS, be it shares, bank accounts or properties. But since ‘maintenance of relatives’ is not in the nature of any asset, one need not show such transfers in the tax return. For some, this could be a plan to transfer money out of the country without attracting the attention of the tax department… I find it difficult to explain this abnormal rise in remittance.”
The remittance to Indian students abroad is equally perplexing, unless the route is used for similar reasons. “Usually, money is remitted directly to the university for the first time prior to admission. Subsequently, funds are sent to the account of the student who then draws the money to pay fees…” said another tax expert.
“I don’t think strengthening of dollar, or expectations that the currency could further go up, had driven such transfers. If that was the case, more Indians would have put money in US bank deposits and securities. While some have, the increase under these heads is not significant,” he said.
Total outward remittance under LRS has been $380.3 million in July 2015 as against $140.7 million in June 2015 and $90.2 million in July 2014.
Of the $380.3 million, the bulk is on account of “maintenance of close relatives” ($124.2 million) and “studies abroad” ($113.9 million).
In February this year, RBI had in its monetary policy statement announced an increase in the LRS limit from $125,000 to $250,000 per person per year. Also, there was a change in way the some of the remittance heads were categorised. But this does not explain the huge rise in remittance towards “maintenance of close relatives” and “studies abroad”.
Source: The Economic Times