Dubai Real Estate Transactions Face Regulatory Challenges: Indian Buyers Using International Credit Cards Encounter Issues

Indian property buyers in Dubai are encountering regulatory hurdles after opting to use international credit cards (ICCs) for their property transactions. This payment method, which was initially seen as a convenient alternative to traditional banking processes, has raised concerns among financial authorities. Buyers are now seeking corrective measures to address potential compliance issues stemming from these transactions.

Challenges with International Credit Card Usage

Many Indian buyers in Dubai have turned to international credit cards for making down payments and installment payments on property purchases. This method was favored for its simplicity, allowing buyers to bypass extensive bank paperwork and potentially avoid the 20% tax collected at source (TCS). However, the use of ICCs for property transactions has come under scrutiny. Banking professionals have pointed out that ICCs are primarily intended for current account transactions, such as purchasing books or booking hotels, rather than for capital account transactions like real estate acquisitions.

While there are no explicit regulations that outright ban the use of ICCs for overseas property purchases, the Reserve Bank of India (RBI) has issued notifications that many interpret as restrictive. This has left buyers in a precarious position, as they may face scrutiny from income tax and enforcement authorities regarding their payment methods.

Seeking Corrective Measures

In light of these regulatory challenges, affected investors are taking steps to rectify their payment methods. Many are opting to remit funds through the RBI’s Liberalised Remittance Scheme (LRS) and are canceling previous credit card transactions, citing errors. They anticipate refunds from builders; however, if these refunds are not forthcoming, they may be forced to sell their properties.

Rajesh Shah, a partner at the CA firm Jayantilal Thakkar & Co, emphasized the need for Indian residents who have made such payments to approach the RBI for regularization. He suggested that the RBI should adopt a lenient stance, as the payments made via credit card were legitimate, even if the method was incorrect. He also noted that while compounding violations involves accepting wrongdoing and paying fines, some buyers prefer to discreetly cancel their credit card transactions to avoid drawing attention.

Understanding the Liberalised Remittance Scheme

The LRS allows Indian residents to transfer up to $250,000 annually for overseas assets and online purchases. However, transactions made using ICCs for property purchases are considered non-compliant, regardless of where the transaction occurs. The RBI’s guidelines specify that individuals must maintain bank accounts for at least one year before making capital account remittances. This regulatory framework complicates the situation for buyers who have already used ICCs for property transactions.

Moin Ladha, a partner at the law firm Khaitan & Co, explained that while property purchases abroad are permitted under the Foreign Exchange Management (Overseas Investment) Rules, 2022, the rules outline specific modes and conditions for such acquisitions. These include inheritance, gifts, and funds in a resident foreign currency account. Since general permission is not granted for property acquisitions using ICCs, buyers must regularize their transactions through post facto approval or by selling the property, followed by addressing any interim non-compliance with the RBI.

Tax Implications and Compliance Issues

Regardless of the RBI’s position on ICC transactions, property purchases abroad are still subject to a 20% TCS under section 206C(1G)(a) of the Income Tax Act. This adds another layer of complexity for buyers who may not have been aware of the tax implications associated with their payment methods. Ashish Karundia, founder of Ashish Karundia & Co, highlighted that compliance with tax regulations remains crucial, regardless of the payment method used.

As Indian property buyers navigate these regulatory challenges, it is clear that understanding the legal framework surrounding overseas property transactions is essential. Buyers are encouraged to seek professional advice to ensure compliance and avoid potential pitfalls in their property investments abroad.

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