Taxation issues concerning high networth individuals
What constitutes an HNI is a tricky question? In general parlance, HNIs are understood to be the individuals with ultra-high networth with deep pockets having surplus investible funds. As per the Credit Suisse global wealth report, currently India is home to around 1,500 ultra-high networth individuals with wealth of at least $ 50 million and 700 who have more than $100 million of assets. Further, according to the Kotak Wealth Management’s annual wealth report ‘top of the pyramid 2015’, in the financial year 2014-15, the number of families with net assets (excluding residence) of more than Rs 25 crore was around 1,37,100, against 1,17,000 a year back.
As under the income tax regulations in India, the term HNIs (reference to high-networth individuals) is not defined and as such the constituents of the HNI category are to be assumed based on the general categorisation by various reports based on either wealth or income of such HNIs.
In recent times, there has been a high level monitoring of transactions done by HNIs by the tax authorities in India and abroad with a view to ensure that there is no escapement of income or wealth from taxation. Some of the latest developments from taxation and disclosure perspective include enactment of the black money law in India, the signing of the Fatca agreement with the US government and various tax exchange information agreements.
Recently, India has enacted a new law to curtail offshore tax evasion. It requires disclosure of foreign income and foreign assets in the income tax return. It would also cover a foreign asset held by an individual as a beneficial owner or otherwise. The undisclosed foreign income and fair market value of the undisclosed asset would be taxed at a flat rate of 30 per cent in the year in which it comes to the notice of the tax officer along with a penalty of 90 per cent of such tax. It also provides for prosecution (rigorous imprisonment up to 10 years with fine) for evasion of tax. No deduction, exemption or set off or carry forward of losses would be allowed on such income. The government has come out with one time compliance window offering an opportunity to taxpayers who have undisclosed foreign assets up to September 30, where in the tax rate and penalty have been cumulatively capped at 60 per cent.
Another development includes the inter-governmental agreement (IGA), which India has entered into with US to implement the Fatca and to promote transparency on tax matters. As the IGA is reciprocal in nature, US will also share the information about the accounts held by Indians with the financial institutions in the USA. India has also signed the multilateral competent authority agreement (MCAA) on June 3, 2015 to enable automatic exchange of information. Till date, 60 countries have agreed to exchange information automatically in accordance with MCAA.
Further, 94 countries have committed to exchange information on an automatic basis from 2017 onwards as per the new global standards on automatic exchange of information known as common reporting standards (CRS) on automatic exchange of information (AEOI). The new global standards oblige the treaty partners to exchange extensive financial information after collecting the same from financial institutions in their country including information about beneficial owners of entities. This would enable India to receive information from almost every country in future and getting information about assets of Indians held abroad including the entities in which Indians are beneficial owners.
Also, India has been taking efforts towards renegotiation of old tax treaties to bring the article on exchange of information to international standards and expansion of India’s treaty network by signing new tax treaties and tax information exchange agreements (TIEAs) with many countries to facilitate exchange of information.
These measures are likely to act as a strong deterrent against non-disclosure of income and wealth outside India and improve tax compliance by the HNIs. Going forward, as the regulations are becoming more stringent and globally integrated with automatic exchange of information between countries, it is pertinent that the HNIs ensure compliance with the tax and disclosure requirements under the income tax regulations in India.
