The government’s recent steps to check the flow of unaccounted wealth to foreign assets and bank accounts have had the unintended result of making tax compliance tough for expatriates on corporate assignments here, who have legitimate assets in their home countries, say experts.
The tax troubles of these people over foreign assets and stock options acquired long before their India stint could hurt the Make in India campaign and make it more challenging to do business here, they feel.
Many expatriates were unaware that they were required to report ownership of property inherited decades ago in their home countries under the foreign asset reporting requirement that India introduced from FY2011-12.
Sources said these expats are facing a flurry of questions from the tax department on their past year returns. The reporting requirement also covers movable assets and bank accounts, with the peak balance anytime during the year.
From assessment year 2013-14 (2012-13 fiscal), the Income Tax Department expanded the scope of disclosures to include foreign income as well as trusts set up abroad.
The prospect of the stringent penalties envisaged in the Undisclosed Foreign Income And Assets (Imposition of Tax) Bill, 2015 — the Black Money Bill — three to seven years rigorous imprisonment for willful attempt to evade taxes and six months to seven years rigorous imprisonment for failure to file return of foreign assets and bank accounts — have given many of the expats a major jolt. Imprisonment is proposed in the Bill in addition to a penalty of 90% of the value of the undisclosed asset or income and a 30% tax on it.
Expatriates affected by the foreign asset reporting norms may be fewer in numbers compared to the total number of tax payers, but they are significant decision makers in business, especially in the manufacturing sector, said Sonu Iyer, Human Capital Leader, EY.
The I-T Department is of the view that Indians who live abroad for work are treated like migrants and are subjected to similar disclosure and penalty provisions relating to their Indian income and assets after a specified period.
Officials explained that not all foreigners who are residents in India (who stayed 182 days or more in the tax year) need to disclose their foreign assets and income here. Only those who stay for more than 729 days in previous seven years in addition to being a resident in the tax year and thus coming under the category ‘Resident and Ordinarily Resident’ need to make these disclosures. A foreign national also has to be a resident in India in two out of prior ten tax years to come under this category.
“That is a good enough time to treat a foreign national who is in India for work as a migrant,” said a source, who asked not to be named.
Experts admit there are similar reporting requirements for migrants in other countries but disapprove of the way the new norms paint both genuine tax payers and potential wrong doers with the same brush.
“The disclosure requirements are in line with the global trends. What we, however, need is an exception built into these rules for foreign assets and income that have absolutely no nexus with India,” said Iyer. In many cases, the investments that are now to be disclosed in India were made by the affected foreigners in their home soil many years before their arrival in India.
Foreign income and asset reporting are applicable for individuals who file income tax return 2,3 and 4 and have to disclose details of tax credits or deduction claimed under double tax avoidance treaties.
Assessees also have to report financial interest in any overseas entity and accounts in which they are the signing authority. In the latest ITR2 for assessment year 2014-15 (for 2013-14 fiscal), the department has further expanded the reporting requirement to include any refunds and tax relief received from another country under a tax treaty and the amount of taxes paid outside India.
The US also has foreign bank account reporting rules and is in the process of signing a deal with India for accessing the details of Americans’ unreported bank accounts and financial investments in India directly. The US follows a system of taxing the worldwide profits of both US residents as well as citizens who are not residents.
Under its Foreign Account Tax Compliance Act (FATCA), American tax payers have to report at the end of the tax year investments in foreign financial accounts, stock, securities, mutual funds and insurance or annuity schemes with a cash value above $50,000.