9911796707
TMI BlogConcessional Tax Regime to non-resident Indians (NRIs) become residents of India : Clause 217 of the Income Tax Bill, 2025, Vs. Section 115H of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... nsive analysis of Clause 217 and Section 115H, delving into their objectives, key provisions, practical implications, and comparative aspects, with a focus on legislative intent, interpretive issues, and policy considerations. Objective and Purpose The legislative intent behind both Clause 217 and Section 115H is to incentivize investment in India by NRIs and to provide certainty and continuity in tax treatment when their residential status changes. Historically, the Indian tax regime has sought to attract foreign capital, particularly from its diaspora, by offering concessional tax rates or exemptions on income from specified assets acquired in foreign currency. However, a challenge arises when an NRI, who has made investments under the beneficial regime, returns to India and becomes a resident. Without a grandfathering provision, such individuals would lose the concessional treatment, potentially resulting in higher taxes and discouraging repatriation or continued holding of such investments. Section 115H was introduced as part of a broader legislative framework to address this concern under the Income-tax Act, 1961. Similarly, Clause 217 in the Income Tax Bill, 2025, seeks to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and litigation in the past. 3. Nature of Income and Qualifying Assets A significant aspect of both provisions is the limitation of the benefit to "investment income derived from any foreign exchange asset." Clause 217 refers to assets "referred to in section 212(e) other than a share in an Indian company," while Section 115H refers to assets "of the nature referred to in sub-clause (ii) or sub-clause (iii) or sub-clause (iv) or sub-clause (v) of clause (f) of section 115C." The exclusion of shares in Indian companies under Clause 217 is notable and marks a divergence from the 1961 Act. The term "foreign exchange asset" generally refers to assets acquired using convertible foreign exchange, such as deposits, bonds, debentures, and government securities, but the precise scope depends on the cross-referenced definitions in the respective statutes. The exclusion of shares in Indian companies in Clause 217 suggests a policy shift, potentially to align with changes in the tax treatment of such instruments or to prevent unintended tax arbitrage. 4. Continuation of Benefits and Termination Once the declaration is made, both provisions allow the continued application of the concessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of "Conversion": The meaning of "conversion (otherwise than by transfer)" may be contentious, particularly in cases of mergers, demergers, or succession events. Practical Implications 1. Impact on Returning NRIs The primary beneficiaries of these provisions are NRIs who have invested in specified assets while non-resident and subsequently return to India. The grandfathering of concessional tax treatment provides certainty and encourages continued holding of such investments, reducing the incentive to liquidate assets prematurely for tax reasons. This is particularly relevant for long-term investments, such as bonds or deposits, which may have multi-year maturities. The requirement of a declaration ensures that only those who are aware of and actively seek the benefit can avail it, but it also places a burden of procedural compliance on returning NRIs. The exclusion of shares in Indian companies under Clause 217 may affect investment choices, potentially discouraging equity investment by NRIs if similar benefits are not available. 2. Administrative and Compliance Considerations For tax authorities, the provisions provide a clear framework for the continued application of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... focused application within the new legislative framework. * Procedural References: Section 115H requires the declaration to be filed along with the return u/s 139 (the general return-filing provision), whereas Clause 217 refers to section 263 (the corresponding provision in the new Bill). This reflects the structural changes in the new legislation. * Terminology: The 1961 Act uses "assessment year" and "previous year," while the 2025 Bill uses "tax year," reflecting the modernization and harmonization of terminology in the new Bill. 3. Policy Evolution The exclusion of shares in Indian companies in Clause 217 may be driven by several factors: to prevent tax arbitrage through equity investments, to align with changes in international tax practices, or to focus the benefit on more stable, debt-like instruments. This change may be seen as a tightening of the grandfathering regime, possibly in response to revenue considerations or perceived misuse under the earlier provision. The continued requirement for a declaration and the tying of the benefit to the continued holding of the original asset remain consistent, reflecting the enduring policy rationale of providing certainty to ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
