Over the past two months, many such persons have been asked to meet officials of ED and explain their source of fund. While many fund transfers are genuine, there are instances where money moved in a circuitous route to evade tax.
“In one case a person has transferred large amounts to his daughter’s NRE account after she attained NRI status by staying abroad for 182 days. In the past, such fund movements would not have drawn the attention of investigative agencies. When the man claimed that the fund was commission income generated abroad, he was asked to furnish the contract with the overseas client,” said a tax practitioner who is advising eight individuals who are in the process of replying to the ED notices.
If someone cannot explain the source of fund, it would not only be a violation of the Foreign Exchange Management Act but also expose the person to tax demands and penalty. Even though NRIs do not have to pay tax for their earnings or funds abroad, none of them can afford to disregard the notices as long as they continue to hold Indian passport.
“As a citizen of India (though not a resident Indian from tax or FEMA perspective), an individual is obliged to respond to any question raised by any regulatory authority be it tax, FEMA, ROC, etc. However, such individuals are not obliged to provide specific details about the transaction which are entered outside India as a non-resident. Typically, such notices and queries are deftly replied,” said Mitil Chokshi, partner at Chokshi & Chokshi, a chartered accountants firm.
Even if a person’s earnings saved in an NRE account are legitimate and deposited while he was an NRI, such individuals may be pulled up if they had continued with the accounts after returning to India. “The address given to the bank while opening an NRE account is the overseas address of the NRI. But somewhere in the KYC documents or the address given in the PAN, the ED may have come across a local address in which the notices are sent,” said a personal familiar with the development.
“I would say 75% of the transactions are genuine. For instance, sons or daughters sending money to parents who in turn have used it to buy listed stocks. But even in these cases, persons receiving notices have to give a proper reply. It can be a little unsettling as they have not had such experience. But there will be many cases where NRE accounts or property investments are ways to bring back the money to India,” he said.
It’s happening at a point when Dubai is losing some of its charm as a destination to park unaccounted money and many are in search of tax havens which are outside New Delhi’s sphere of influence. “Since early 2016, all remittances to and from entities in UAE Free Trade Zone is being questioned by the banks for their genuineness. The Central Bank of UAE has become more active and every so-called pass through transaction is being questioned for its substance,” said Rashi Sakaria, CEO of Adarsha Advisors LLP, which advises cross-border inbound and outbound transactions.