Budget 2019: HNIs look at ways to escape new impost

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Published: July 24, 2019 7:00:52 AM

India Budget 2019: Tax consultants that FE spoke to said the government’s move has come as a dampener for many of their HNI clients, so much so that some of them are even considering moving abroad.

Budget 2019-20: The surcharge on taxable income between Rs 2 crore and Rs 5 crore is now 25% and 37% for those with taxable income above Rs 5 crore; whereas it was 15% earlier in both cases.

Union Budget 2019: Since the Budget proposed to hike the surcharge on the super rich, tax advisers and consultants have been inundated with queries from the ‘annoyed’ high net worth individuals (HNIs) on how to mitigate the tax pinch. The higher surcharge has raised the effective tax rate by 3.1 and 6.9 percentage points for those with annual taxable income of Rs 2-5 crore and above Rs 5 crore, respectively.

Tax consultants that FE spoke to said the government’s move has come as a dampener for many of their HNI clients, so much so that some of them are even considering moving abroad. While the Budget decision would not allow them to save taxes on earnings in the country, the assets accumulated abroad would not be subjected to higher surcharge on the capital gains accruing from them.

“The higher surcharge is not only limited to those earning an income above certain threshold every year. For instance, if a person whose income is well below, say, Rs 2 crore in a year, decides to sell an asset worth Rs 15 crore, she may get to pay the higher tax on capital gains due to the increase in surcharge if the gains exceed Rs 2 crore,” Amit Maheshwari, managing partner at Ashok Maheshwary & Associates said.

The surcharge on taxable income between Rs 2 crore and Rs 5 crore is now 25% and 37% for those with taxable income above Rs 5 crore; whereas it was 15% earlier in both cases. This has raised the effective tax rate to 38.9% for and 42.7% for the two categories respectively, up from 35.8% earlier.

Another option being considered by HNIs who are promoters of firms to avoid the higher tax is to float limited liability partnerships (LLPs) to obtain constancy fees from their own firms, rather than draw salary from the firms. Such LLPs could employ a few and will also have expenses to show to reduce its tax outgo. The effective income tax rate on LLPs is about 35%, which is lower than effective tax on the super rich, after the Budget.

Moreover, an LLP doesn’t have to pay dividend distribution tax (DDT) on payout from earnings which makes it a better tax planning route than incorporating a company, a tax advisor said on the condition of anonymity.

Further, a trust (FPIs) converting into an LLP to avoid higher surcharge could be hauled up by the tax department under the general anti-avoidance rules (GAAR), as the entity would have to prove that such restructuring wasn’t effected solely for the purpose of tax avoidance. But the same might not be applicable for an HNI as GAAR kicks in only at a possible tax benefit of Rs 3 crore.

However, the options for saving taxes on account of higher surcharge are more limited for a salaried employee, who is not a promoter. An employee could at best negotiate with her employer to split the cash remuneration into part employee stock option plan (ESOP), which allows an employee to own equity shares of the company.

ESOPs are taxed at the time of the employee agreeing to buy the stock; it is in the form of tax deducted at source on the difference between fair market value of stock and the actual price. At the time of sale of the stock, the proceeds are taxed as capital gains. “This is not a tax-free option but defers the tax liability to a later date,” another tax consultant said.

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