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I am an Indian citizen and I run a semi-drop shipping business. The details are:

  1. I deposited 10 lakh through cheque/cash into my Indian savings bank account (PAN not submitted during account opening; only form 60 was submitted). This money was borrowed from several relatives.
  2. I then deposit this amount into a 'Foreign online account' using my bank's debit card (billed as purchase). All my business activities are carried out using this 'Foreign online account.'
  3. In about a month, I make a profit in foreign currency of the equivalent of 2 lakh.
  4. I then withdraw 10 lakh from this foreign account back to my Indian debit card (billed as merchant refund). The 2 lakh profit is NOT withdrawn.

In short, technically, it looks like a purchase of 10 lakh and a merchant refund of 10 lakh (every month). Hence I am not making any profits. The money just keeps jumping between the Indian and foreign account every month. Can I get slapped by an income tax notice? If yes, then how do I proceed?

EDIT: The 'Foreign online account' is 'Neteller' http://www.neteller.com/ .This account can be opened by anyone having a debit card.

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Without addressing the specifics of the Indian law, you're clearly generating income, which is clearly not taxed. Not a single country that I know of would allow untaxed income. So I suggest to talk to a tax adviser and a lawyer, because 99% you're doing tax evasion. –  littleadv Nov 19 '12 at 10:43
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2 Answers

Please consult a tax advisor.

You may be voilating the FEMA [Foreign Exchange Management Act] and can land into trouble.

Further what you are doing can land up into various other acts as illegal including AML.

Further if there is income generated by Indian citizen in India, he is still liable to pay tax, irrespective of whether you get the funds back into India.

Edit:
AML is Anti Money Laundering. Your transaction is sure to raise AML triggers as it looks like converting Black Money to White in round about way. Once the triggers are raised, RBI division will investigate further to verify what you are doing. If you are able to prove that this is a valid transaction, you would be OK on AML front.

How will Income Tax Know?
- If they don't know does not mean you are not liable for tax.
- Any suspicious transactions would get investigated and sooner or later Income Tax would know about it and can cause a serious problem.
- It is irrelevant where you have kept the money, if you have earned something, its taxable. For it not to be taxable you need to conduct this business differently.

Please consult a tax adviser who will advice you on the tax-ability of this type of transaction.

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I really apprciate your promp response Dheer.Regarding AML I had deposited 10 lakh & even after a year the amount in my savings account will remain 10 lakh so how can IT say i have earned or indulged in something illegal? Also, my business is 'Drop-shipping' where goods (electronics) are shipped by the main supplier based in HK to buyers from other countries on my behalf.In my savings account statement,it looks like a 10 lakh purchase & then a 10 lakh merchant refund. Kindly shed some light. –  Akash Nov 19 '12 at 9:20
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@Akash, it isn't whether IT can say you have earned money or not. How likely they are to discover your earnings is beside the point. The fact is you will have earned money and have a responsibility to report it. If you don't, such action constitutes fraud and income tax evasion. –  Chris W. Rea Nov 19 '12 at 15:19
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Akash, it will take an income tax officer about 1 hour to discover you are making a profit of Rs. 2 lakh per month, retained in your foreign account, because they have every right to ask you what you are doing. As an Indian resident you have to pay full taxes on all income regardless of where this income resides. –  Deepak Shenoy Jan 20 '13 at 19:14
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I find that there are two violation of law , prima facie , if someone earns money by depositing in the online account and then not reporting it ( including in his total income for the year ) and not bringing in India.

Income Tax Act violation 1. It is simply comcealment liable for penalty & prosecution under I.T.Act. 2. You should know that anyone who is resident of India as per income Tax Act and having taxable income ( gross total income exceeding exemption limit) will have to fill up the column in his/her income tax return whether

  1. he has foreign bank account or
  2. He/she is signatory to any bank accounts
  3. He /She has assets aborad

Previously these column were not in the Income Tax Return. So , now anyone who is liable to file return of Income can be tried for false return if he has hiddne assets aborad.

2. FEMA violation RBI permits remittance under Liberalized Remittance Scheme. However this scheme can not be used for certain purpose . It is important to examine whether RBI prohibits use of remittance for any entity or business you have described. You can read following FAQ on RBI site

Q. 30. What are the prohibited items under the Scheme?

Ans. The remittance facility under the Scheme is not available for the following:

i) Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery tickets/sweep stakes, proscribed magazines, etc.) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000;

ii) Remittance from India for margins or margin calls to overseas exchanges / overseas counter-party;

iii) Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market;

iv) Remittance for trading in foreign exchange abroad;

v) Remittance by a resident individual for setting up a company abroad;

vi) Remittances directly or indirectly to Bhutan, Nepal, Mauritius and Pakistan;

vii) Remittances directly or indirectly to countries identified by the Financial Action Task Force (FATF) as “non co-operative countries and territories”, from time to time; and

viii) Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.

You will have to examine , if the remittance was NOT done for purpose not allowed by RBI under LRS . If you clear this , you can say there is no violation and your violation is restricted to I.T.Act only.

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Hi, welcome! I removed the promotional link in the end, if you want - you can add it to your bio info so that people can see it there and click through to your site. Linking to a specific and relevant article on your site might be very helpful if people were actually able to read it. Unfortunately your site requires subscription and payment, so its not really helping anyone. But +1 for the informative answer! –  littleadv Aug 22 '13 at 2:52
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