HNWIs bidding adieu to India - under tax scanner

Recent times have witnessed increasing trend of individuals, primarily High Net Worth Individuals (‘HNWIs’), migrating from India with or without surrendering their Indian citizenship. According to the report by New World Wealth, 7,000 ultra-rich Indians shifted overseas in 2017, while in 2016, this figure stood at 6,000. In 2015 as many as 4,000 millionaires shifted their base outside India.

Migration of HNWIs, having their strong personal and economic ties in India, may lead to a revenue leak on account of change in their residential status to ‘non-resident’ in India.

Under Indian Income tax Act, residential status of an individual is based on number of days stayed in India, as against many countries which levy tax based on citizenship or domicile..

Currently, it is possible for a migrating HNWI to so plan his affairs in a manner that he does not pay tax in his new jurisdiction as well in India. This may lead to a double non–taxation in an event the new jurisdiction does not levy tax on migrating HNWI (either on account of it being tax haven or on account of income not being remitted to new jurisdiction or similar criteria) and simultaneously, India not being able to tax global income on account of his non-resident status in India.

Worked up with the upward migration trend and with an attempt to probe into cases of such non-double taxation, a Working Group has been constituted with the approval of the Central Board of Direct Taxes (‘CBDT’) to examine the taxation aspects of the HNWIs. This Working Group shall also make recommendations for policy decisions in respect of tax risks of the migrating HNWIs.

As per current domestic law, the residential status of an individual is solely dependent on his physical presence in India. In other words, a person having his economic ties in India may be declared a non-resident, the moment his stay does not exceed the prescribed number of days and shall be taxable in India only on the income arising in India. Once his status turns into a ‘non-resident’ for tax purposes, he can also refrain from reporting details of his foreign assets and income in his Indian tax return.

As compared to the Indian law, the tax laws of the United States of America (‘USA’) provides for levy of tax on global basis for its citizens. For others, it determines residential status on the basis of substantial presence test.. Thus, a US citizen migrating from USA would be taxable in the USA on global basis though he may have physically moved therefrom.

Likewise, to protect the interest of the Revenue at the time of surrender of tax residence/ citizenship, certain countries impose tax on the migrating individual on the unrealized gain attributable to the period of his residence/ citizenship. USA, for instance, imposes an exit tax upon surrender of US citizenship. Likewise, Canada levies departure tax and Spain levies exit tax on change of residential status of the individuals.

It would be interesting to see how the Working Group considers various measures, including those adopted by other countries, to plug what it believes to be tax leaks on account of HNWI migration from India.

This article was originally published in Financial Express. Read the article here.

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