BOMBAY CHARTERED ACCOUNTANTS SOCIETY FEMA STUDY CIRCLE PRESENTATION ON INVESTMENT IN IMMOVABLE PROPERTY IN INDIA & OUTSIDE INDIA ON 13 TH APRIL, 2004 1
GENERAL The term immovable property not defined. It includes commercial property. Under FERA, acquisition of IP in India was governed by citizenship criteria, whereas under FEMA the same is governed by the criteria of residential status. The word transfer is defined in the Act u/s. 2(ze) to include sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien. 2
General Contd 3 Investment in IP is a Capital account transaction as defined u/s. 6 of the FEMA. Section 6(3)(h), 6(3)(i), 6(4) and 6(5) govern the transactions relating to IP in/outside India. Various regulations are framed liberating the transactions of IP. We will be covering the following Notifications dated 3 rd May, 2000 namely 7 & 21 in particular and notifications 4 & 13 as far as applicable to IP. We will be discussing some CASE STUDIES for better understanding.
Investment in IP outside India Authority given to RBI under Section 6(3)(h) of FEMA. Notification No. 7 dtd. 3.05.2000 issued. Person Resident in India (PRI) is prohibited to acquire or transfer any IP outside India without permission from RBI. (Regulation 3) 4
IP outside India Contd Exemptions : IP acquire on lease not exceeding 5 years, IP held by a PRI who is a foreign citizen, IP acquired by a PRI on or before 8 th July, 1947 and continued to be held by him with the permission of the RBI, A PRI may hold, own or transfer any IP situated outside India if such IP was acquired, held, owned by such person when he was resident outside India or inherited from a person who was resident outside India. (Section 6(4) of FEMA). 5
IP outside India Contd PRI has been given general permission to acquire IP situated outside India in the following situations : a) Gift or inheritance from a returning NRI or from a person holding the property prior to 8.07.47 with the permission of the RBI, b) Purchase out of RFC account c) Resident Individual (w.e.f. 4.02.2004 vide Circular No. 64) can now remit upto USD 25,000 per calendar year for acquisition of IP outside India except for in certain countries. 6
IP outside India Contd A person who has acquired IP as stated in (a) & (b) above can further transfer the same by way of Gift to his relative who is also a PRI. Whenever the IP is sold by PRI then the income earned thereon needs to be remitted to India within seven days in terms of the requirement of Regulation 5 of Notification 9 on Realisation, Repatriation and Surrender of foreign exchange. Circular No. 57 dtd. 13.01.04 Liberalisation - Investment in Agricultural activity including purchase of land. 7
Case Studies M/s. XYZ Ltd. opens a branch office in USA. It is desirous of acquiring a commercial place for its office and a residential house for one of its employees in USA. Whether M/s. XYZ Ltd. is permitted to purchase the same. Mr. Patel, a UK citizen, has returned to India for good. He has received foreign income of more than US $ 35,000 which he plans to invest in acquiring an IP in UK. Can he do so and how. 8
Case Studies Contd Section 6(4) a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India 9
Investment in IP in India Authority given to RBI under Section 6(3)(i) of FEMA. Notification No. 21 dtd. 3.05.2000 issued. Section 6(5) deals with the situation of IP in India by a Person Resident Outside India (PRO). General permission has been granted to PRO who is a citizen of India and a Person of India Origin (PIO) resident outside India to acquire/transfer IP in India. Blanket prohibition for acquisition of agricultural land/plantation/farm house. 10
IP in India Contd Other than PRO who is a citizen of India and PIO, no other person can acquire or transfer any IP in India without specific permission from RBI, Exception - situation stated in Section 6(5) of FEMA, however prior permission of RBI is required for repatriation of sale proceeds. Prohibition on citizens of eight countries. However in both the above situation prohibition is not applicable if property is acquired on lease not exceeding five years. 11
IP in India Contd Section 6(5) a person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India 12
IP in India Contd PIO defined as an individual not being citizen of eight prohibited countries Who at any time held an Indian Passport He or either of his father or grandfather was an Indian citizen 13
IP in India Contd PRO being a citizen on India ACQUISITION No restrictions on acquisition of IP except agricultural land, plantation/farm house. Person of India Origin c) Acquisition only by inward remittances or out of funds held in any type of nonresident bank a/c. d) Gift from a PRI or from PRO being a citizen of India or from a PIO. e) Inheritance from eligible person. 14
IP in India Contd TRANSFER Transfer to a PRI (including foreign citizen) Transfer to a PRO who is a citizen of India or to a PIO other agricultural land, etc Transfer includes gift Section 2(2e) of FEMA Transfer by way of sale, other than agricultural land/farm house/plantation property to PRI (whether Indian citizen or not) Transfer by way of gift or sale incld. agricultural land, etc. to a PRI being an Indian citizen. Transfer residential/ commercial IP by gift to PRI, PRO & PIO. 15
Acquisition of IP in India by other entities A PRO having a branch, office or other place of business in India, except a liaison office, can acquire IP in India which is necessary for or incidental to carrying on such activity without any prior permission. However it has to comply with the applicable laws, rules, regulations or directions and filing of declaration in Form IPI within 90 days of acquisition. Such property can be mortgaged with AD as security for any borrowings. 16
IP by other entities Contd Prior approval is required for repatriation of sale proceeds. Liaison offices can go for leased premises not exceeding five years but one can plan with a provision for renewal every 3/5 years. Circular No. 19 dtd. 23.09.03 inserts a new regulation No. 5A permitting purchase/sale of IP by Foreign Embassy/Diplomat/ Consulate General provided acquired by way of inward remittances and prior clearance of Ministry of External Affairs, GoI. 17
Repatriation of Sale Proceeds Recent liberalisations So far only the cost of property which was funded either out of inward remittances through normal banking channel or out of NRE/FCNR accounts could be repatriated, but RBI has recently issued Circular No. 43 dtd. 8.12.2003 whereby NRIs/PIOs can repatriate upto USD 1 million per calendar year out of their NRO account, which includes sale proceeds of IP. The holding period of three years for availing of repatriation benefits removed. Cir. No. 35 dtd. 1.11.02. 18
Repat. of Sale Proceeds Contd. 19 Conditions for repatriation of sale proceeds of IP other than agricultural land, etc : The IP was acquired by the seller in accordance with the provisions of the Foreign Exchange law in force at the time of acquisition or the provisions of FEMA regulation. In case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.(per remitter during his life time) The amount to be repatriated does not exceed the amount paid for acquisition of the IP in foreign exchange remitted or held in Non-Resident accounts Upto USD 1 million per calendar year, including sale proceeds of IP subject to CA certificate & undertaking.
Remittance of Assets held in India by Non-Residents A foreign national or a PIO who Has retired from an employment in India Has inherited the assets from a PRI A widow who is a PRO who has inherited assets from her deceased husband who was an Indian citizen, resident in India NRI/PIO who acquired the assets in question, out of rupee resources when he was in India or by way of legacy/inheritance from a person who was a resident in India 20
Remittance of assets Contd Sale proceeds of IP can be repatriated upto USD 1 million per calendar year provided the property/sale proceeds were held/retained as deposits cumulatively for a minimum period of 10 years. There is no lock-in-period in respect of IP acquired by way of inheritance/legacy or out of inward remittances or by debit to NRE/FCNR account. If the remittance is made in installments then all such installments should be remitted through only one AD. 21
Case Studies 1. Mr. Prakash, a NRI, applied in the CIDCO scheme for allotment of flat at Belapur and paid an earnest money of USD 26,000. However due to poor response the scheme was cancelled. Now Mr. Prakash is desirous to repatriate the funds back. Can he do so & how? 2. Mr. Desai, a NRI has in terms of Regulation 8 of Notification No. 4 dtd. 3.05.2000 had availed of housing finance loan for acquiring his residential flat on 15.06.2000. He has repaid substantial part of the loan from his NRE account. He has sold the flat and now wants to repatriate the sale proceeds. The AD is refusing to do so since the original purchase was in Indian rupees by way of a loan. What is his remedy. 22
Case Studies Contd 3)Mr. Patel, PIO, had purchased a residential house in the year 1983, however he did not file Form IPI7 as required under FERA. He has now sold his flat and wants to remit the sale proceeds. a) Will he be permitted. b) Assuming Mr. Patel stays in USA and he has sold this flat to another PIO Mr. Shah staying in USA for Rs. 2.25 crores. The AO has issued a notice on Mr. Patel for non-deduction of tax at source. Is the AO justified. c) The value of the said property for stamp duty purposes if Rs. 2.50 crores. Whether Sec. 50C can be made applicable. On what amount the tax, if any, needs to be withheld. 23
Case Studies Contd 4) Mr. Agarkar has come for your advice since he intends to purchase a property from a NRI. The NRI has clarified that he intends to invest in bonds u/s. 54EC and therefore there will be no capital gains liable to tax. What precautions he should take. Whether he will be able to pay off the NRI without withholding of tax. 5) Mr. Tendulkar a PRI holds IP in USA which he had purchased when he was a NR. He intends to sell the same and acquire a villa in Cayman Islands. Will it be possible for him to do so. 24
Case Studies Contd 25 6) M/s. Biscon Ltd. operates through a rented property owned by a NRI. The monthly rent is Rs. 8,000/- p.m. During the assessment proceeding of A.Y. 2002-03 the AO disallowed the claim as exps. of the rent paid by the Co. since the Co. had not deducted tax at source at the time of payment of the rent. The Co. contends that since the yearly rental does not exceed Rs. 1,20,000/- therefore there is no need for TDS deduction and therefore the AO s disallowance is unjustified. Is the Company s contention correct?. The Co. has continued paying the said rent in the F.Y. 2003-04. Does the position change.
Case Studies Contd 7) Whether any interest or share in a Co-operative Society or Apartment Owners Association (Also known as Condominium abroad) is an IP for the purposes of these regulations? 8) Mr. N is working in Israel since the last 3 years. He inherits a bunglow at Juhu upon demise of a close relative. Does he have to inform RBI about this? Is any permission required to be obtained for this? Can he sell the property and take out the sale proceeds, as he does not intend to return to India. 26
THANK YOU 27