INDIA BUSINESS WORLD - March 1^st - March 15^th - 2008

PE FUNDS BUY 3% IN ACME FOR RS 400 CR

Interest on non-resident ordinary (NRO) deposit may be taxed at the rate of 20%, instead of the prevailing practice of levying 30%, according to an order from the Authority for Advance Ruling (AAR), a quasi judicial body for tax disputes. Though AAR rulings can be challenged, such orders have a persuasive value and often act as guidelines for tax officers as well as taxpayers.

NRO deposits are rupee account of NRIs from the money they earn and save in India. The earnings could be in the form of salary drawn in India, rent received from properties here, dividend or transfer from resident account. The interest on this account is repatriable after payment of applicable taxes in India.

At present banks consider such income as interest income or income from other sources and deduct tax at the rate of 30%.

NRIs have been asking for years that this should be lowered to 20%, the rate at which interest from foreign currency accounts are taxed. AAR observed that since NRO deposits are in the nature of convertible foreign exchange, these deposits are similar to foreign exchange assets. AAR also held that such deposits can be considered as investment under section 115 C of the Income-Tax Act.

A note from AAR office said: "Interest income earned from NRO deposit shall be treated as 'investment income' and shall be liable to tax at the rate of 20% and banks paying interest on NRO deposit are required to deduct tax at this rate."

"If a person is a resident of a treaty country, he is entitled to use the treaty for lower rate of tax. However, if no treaty is available, the benefit of section 115 cannot be claimed," said senior chartered accountant T P Ostwal.

The application before AAR was filed by V Ravi Narayanan from Saudi Arabia.