NRIs
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This article is written by Soumi Ghose, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. She is a Legal Counsel in ICON PLC. The views and interpretations expressed in this article are those of the author in her personal capacity, and do not represent any views of ICON PLC or any of its Affiliates.

Introduction

NRIs are the “Non-residential Indians”, whose contribution in the economy of India and in turn in the growth of India has always been highly valued by the Government. This NRI concept is defined under the Income Tax Act, 1961 and the Foreign Exchange Management Act, 1999 (FEMA). Investments by NRIs including investment in an LLP business in India, are treated as a “foreign investment”.
Further, after realising the potentiality of These investments are in compliance with and primarily regulated by laws like- Income Tax Act, 1961 (“I.T”), Foreign Exchange Management Act, 1999 (“FEMA”),  Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (“TISPRO“) and regulations laid down by Reserve Bank of India (“RBI”). Additionally, as described under Organization for Economic Co-operation and Development (“OECD”), any investment of 10% or above from overseas is considered as Foreign Direct Investment (“FDI”).  

The definition for “NRI” as provided under I.T Act, 1961 and FEMA Act, 1999 are distinct from each other. I.T Act, 1961 decides, “how the income from the different investment would be taxed”, whereas, FEMA Act, 1999 decides, “where an NRI can invest”. 

Definition under I.T. Act, 1961 

An individual, if satisfying/ complying with the following tests, is a “resident India” or else, is as “non-resident”:- 

  1. If the individual is in India for 182 days in the Financial Year, or
  1. If the individual is in India for 365 days during 4 years preceding Financial Years AND at least 60 days in that Financial Year.

Definition under FEMA Act, 1999

FEMA defines NRI as an individual, who resides outside India and is a citizen of India or is a Person of Indian Origin (“PIO”). 

Further, under the FEMA Act, PIO is described as a citizen of any country other than Bangladesh or Pakistan and:-

  1. who at any time held Indian Passport, or
  2. who or either of whose parents or any of the grandparents was a citizen of India under the Constitution of India or Indian Citizenship Act, 1955, or
  3. who is the spouse of an Indian citizen or spouse of a person referred to in 1 and 2 hereinabove?

There is a certain point of distinction regarding the concept of “NRI” as mentioned under I.T.Act, 1961 as well as FEMA, these are:-

Sl.No.

I.T.Act, 1961

FEMA Act, 1999

1.

It is a revenue law.

It is a regulatory law.

2.

Physical presence of an individual in India for the respective/ current Financial Year should be for 182 days or more, in order to qualify as a “Resident”.

Physical presence of an individual in India during the Preceding Financial Year should be for 182 days or more, in order to qualify as a “Resident”.

3.

The Act defines “Financial Year” as the period commencing from April 1 to March 31 of the subsequent year.

FEMA complies with the definition of Financial Year, as provided under I.T Act.

4.

For an NRI, only the quantum of the income earned from India or Indian resources would be taxed in India.  However, no approval from the I.T Act 1961 is required for earnings by the NRI in India. This Act is only concerned with the amount of taxable income and the sum paid as tax on the said income. 

The purpose and intention of any individual to stay in India is relevant for considerations under FEMA. Number of days stay is only one of the factors, which can help to determine the status. Income earned by such individuals would be required to be computed under the I.T Act, 1962.

 

4.

The Act determines the income of a person for the complete Financial Year.

The Act considers the residential status of an individual on a particular day, to help the person to ascertain whether he can or he cannot any particular transaction. This enables the individual at any point of the year, unlike the I.T. Act, 1961, to be confirmed about his residential status. 

Investment in an LLP by NRI

Investment in an LLP is considerably a cheaper form of investment and lesser number formalities are required to be complied with, in comparison to investment in any other form of businesses in India, including but not limited to private companies.

The RBI empowers an NRI investor to invest money in Indian businesses by following two basic routes of foreign direct investment (FDI) in India:

    1. Automatic route: Under this route, the government approval for investment is not required to be separately obtained by an NRI before making any investment in India, as the name itself suggests that it is an investment through the “automatic route”. Nevertheless, this approval, for investment through automatic route is limited to some specific line of businesses alone. The investment to be made under this route, by the NRI would directly be made to the business of their choice and is subject to all the prevailing rules and regulations as may be applicable from time to time.
    2. Approval route: Under this route, the government’s permission is a mandate before making any investment by the NRI in any prescribed line of businesses.

In the year 2015, the Government policy decisions/ policies have significantly liberalized FDI investments in LLPs in India. Since then, the NRIs are allowed to make FDI investments in LLPs up to the extent of 100%.  The rationale behind this liberalisation was to promote foreign investment inflows in certain sectors of business in the country. In other words, for direct investment under Automatic Route, the investor does not need to seek for any prior approval from the Foreign Investment Promotion Board (“FIPB”). If an NRI adheres to the specific sectoral limits as laid down by the policies, then it is allowed to invest up to 100% in LLPs in India. All the related provisions for investing in LLPs in India are as follows:-

    1. Fortunately, there lies no condition relating to any performance linked with FDI; 
    2. Under Section – 7 of Limited Liability Partnership Act, 2008, foreign companies or individuals including NRIs, can be appointed as Designated Partner in the LLPs; 

Foreign Portfolio Investments (FPIs) or Foreign Venture Capital Investments (FVCI) can contribute to the capital of LLPs in India.

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Schedule 4 of the TISPRO Regulations allows an NRI to invest on non-repatriation basis, in the capital of a limited liability partnership, without any limit. In addition to the above, an NRI is also allowed to invest, by way of contribution to the capital of a firm or a proprietary concern in India. An NRIs is also now allowed to make above-said investments, through the partnership firms that are incorporated outside India and are owned and controlled by NRIs or OCIs.

In addition to the above, Schedule 4 of TISPRO Regulations also specify the “Mode of Investment to be followed by an NRI, while investment in India on non-repatriation basis.  These are the following manners by which, the amount payable towards consideration, in case of NRI investments on non-repatriation basis can be carried out:-

  1. by direct investment through inward remittance from abroad (through proper banking channels); (or)
  2. out of funds held in Non-Resident External (NRE) or Foreign Currency Non-Resident (Bank) (FCNR(B)); (or)
  3. through Non-Resident Ordinary (NRO) account maintained in accordance with the Deposit Regulations.   

However, the sale or maturity proceeds (subject to applicable taxes) of such investments shall be credited only to the NRO account of the NRI investor, irrespective of the type of account from which the consideration was paid by the respective NRI. Further, the capital appreciation on such investments is also not allowed to be repatriated abroad. However, dividend and interest income will be freely allowed to be repatriated, being of the current account in nature. 

A brief understanding of different types of “account” maintained for NRIs

1. Non-Resident External Account: It is a rupee account that only NRIs are permitted to open and maintain with the authorised dealers and with banks (including co-operative banks) authorised by Reserve Bank of India (“RBI”) to maintain such accounts. These accounts may be maintained in any form viz. savings, current, recurring or fixed deposit account. 

For these above-stated accounts, “Credits” permitted to this account as inward remittances are:-  

i) interest accruing on the account or the investment; 

ii) transfer from other NRE/FCNR(B) accounts, and

iii) maturity proceeds if such investments were made from this account or through inward remittance. 

The debits allowed from this account are local disbursements, transfer to other NRE/FCNR(B) and investments in India.

2. Foreign Currency Non-Resident (Bank) (FCNR(B)): It is an account maintained only by NRIs in foreign exchange with the authorised dealers and banks authorised by the RBI to maintain such accounts. These accounts can be maintained only in the form of fixed deposits and the conditions related to debit and credit to such accounts shall be same as applicable on the NRE accounts.

Conclusion

Any NRI is allowed to invest in India, either under Automatic or Government Approved path depending on the sector, in which, the NRI is interested to invest and subject to the exclusion of the prohibited sectors. Simultaneously, it is to be borne in mind by the NRI investor that Foreign Direct Investment is a capital account transaction and any violation of the regulations, rules and laws associated it is critical and attracts penal provisions under FEMA. Further, any transaction under FEMA is administered by RBI and in case of any violation, the Directorate of Enforcement, Ministry of Finance – Government of India has the authority to investigate. Notwithstanding anything mentioned hereinabove, with the recent development of various kinds of attractive business schemes in India helping the NRIs to connect more with the Indian and increasingly with its economy.


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