Indians Face Scrutiny for Dubai Property Buys Using Credit Cards

Mumbai: As the Dubai property market faces challenges, Indians who used credit cards to buy homes in the desert metropolis are now receiving notices from the Enforcement Directorate (ED). These individuals, often unaware of the legal implications, used international credit cards (ICCs) to make initial deposits or paid through links sent by UAE developers.

At least three individuals received notices from the central agency in February, questioning the source of funds for their property purchases. Credit card transactions are akin to short-term loans, and foreign exchange regulations prohibit individuals from borrowing to buy foreign properties. The Reserve Bank of India (RBI) requires that any such transactions be made through official banking channels under the Liberalised Remittance Scheme (LRS).

Those who have received notices and those who are yet to come under scrutiny find themselves in a difficult situation. They must bear the hassle and cost of correcting the transaction, which may include paying fines and, in some cases, selling the property in a weak market. The reputation of Dubai as a safe haven is also under a cloud due to the ongoing economic crisis in the region.

"The recent round of ED notices have gone to individuals who may have unknowingly used credit cards to buy UAE properties. They should approach RBI to regularise the mode of payment. RBI may take a lenient view as the money is legitimate even if the mode of payment is wrong. Many a time resident Indians do cross-border purchases without knowing the law or consulting CAs," said Rajesh Shah, partner at the CA firm Jayantilal Thakkar & Co, which specializes in forex and anti-money laundering regulations.

To regularize the transaction, individuals must complete the administrative process, which could involve remitting fresh funds through banks and instructing the builder to return the amount paid via credit card. In certain circumstances, the RBI may ask buyers to sell the property and bring back the funds. However, this involves arranging funds without borrowing and remitting dollars at a time when the rupee is at a new low.

"Using international credit cards (ICCs) for such purchases falls outside the permitted structure since acquisition of overseas property is treated as a 'capital account' transaction. Where such payments have already been made, individuals may need to examine regularisation options, including the RBI's compounding mechanism," said Moin Ladha, partner at Khaitan & Co.

ICCs, similar to local cards, are intended for current account transactions like buying books, downloading movies, and booking hotels. According to Pankaj Bhuta, founder of the CA firm P. R. Bhuta & Co, even where the ED has initiated an investigation against a resident individual, the latter may opt for compounding before the RBI at any time until the conclusion of adjudication proceedings.

"Such compounding is typically subject to a no-objection from the ED, which in recent cases has been granted where it is satisfied that permitting compounding is aligned with the true spirit and intent of the Foreign Exchange Management Act (FEMA). In such cases, the RBI is empowered to cap the compounding amount at ₹2 lakhs," said Bhuta.

Under the LRS, a resident individual can transfer up to $250,000 a year to buy assets abroad and shop online from India. Some individuals who used ICCs to buy properties may have done so to preserve their annual LRS limit. However, this approach now puts them at risk of legal scrutiny and potential penalties.