India is thought to have more citizens living abroad than any other country in the world – in excess of 30 million, according to Indian government estimates.
This number is divided into non-resident Indians (NRIs), broadly speaking Indian citizens who are not resident in India for tax purposes, and persons of Indian origin (PIOs), largely non-resident individuals who have previously held Indian passports or are the children or grandchildren of Indian citizens.
India, like most countries, taxes individuals on their worldwide income and gains only if they are tax-resident in India.
Those who are non-resident for tax purposes are generally only liable for tax on their local source income. NRIs will therefore only be subject to Indian tax on their Indian source income and are required to file Indian tax returns.
This comprises a significant number of NRIs who have property or business interests in the region.
Here, we outline the tax and regulatory issues NRIs have to face, including two multi-jurisdictional case studies.
Regulatory reform
India has already introduced a number of measures to crack down on corruption and squeeze the black economy, most famously when it removed the 500 and 1,000 rupee bank notes from circulation in November 2016.
As part of these ongoing measures, various changes have been made to the tax return forms. For example, it has become a requirement for Indian-resident individuals who file tax returns to link their tax identification number to their biometric identification card, known as an Aadhaar. As a result, there was concern that NRIs would be required to obtain an Aadhaar, but the Indian government has clarified this is not the case.
Prime locations for NRIs
There are a large number of NRIs in the global financial centres and tech hubs, particularly in the GCC (the UAE, Saudi Arabia, Bahrain, Kuwait, Oman and Qatar), UK, Singapore, US and Canada.
There is also a growing number of NRIs in the high net-worth and ultra-high net-worth categories. They are internationally mobile, often with assets in several jurisdictions, meaning significant regulatory requirements.
Double tax treaties
Like India, many countries require tax returns, even for non-residents. A growing list of jurisdictions now share tax information when individuals hold accounts or assets in countries where they are not resident.
Individuals can be protected from tax by the provisions in a double tax treaty (DTT), although this may not in itself negate the requirement to submit tax returns.
For example, the UK has two DTTs with India, one covering income tax, capital gains and corporation tax, and, unusually, another for inheritance tax. India has DTTs with approximately 95 jurisdictions, while the UK has more than 130.
Although most DTTs covering income tax follow a model provided by the Organisation for Economic Co-operation and Development, each can be different. To rely on the provisions, the individual must be resident in one or both countries covered by the DTT.
Case study 1
Mr X, who is an NRI living in Dubai, has a number of assets generating income in the UK and in India.
Mr X would not rely on the terms of the UK-India DTT to limit his tax liability, instead he must look at the UK-UAE tax treaty to deal with UK source income and the India-UAE tax treaty to deal with Indian source income.
Case study 2
Mr Y is a retiree and splits his time between the UK and India. Although he qualifies as both a UK and an Indian tax resident, his permanent home is in India. Mr Y receives a UK pension, owns shares in a US company that pays him dividends, has a bank account in Jersey that pays him interest and receives rent from properties he owns in both the UK and India.
On the basis that he is tax resident in both India and the UK, he is theoretically liable to income tax on his worldwide income in both countries. We turn to the UK-India DTT to determine in which country he is resident for the purposes of the treaty and therefore where he is taxed.
As Mr Y has a permanent home in India, he is Indian treaty resident and India will have taxing rights in relation to the UK pension, the US shares, the Jersey bank account and the properties in India and the UK.
The UK would not have taxing rights in relation to the UK pension or the properties in India but will have primary taxing rights in relation to the UK property. The UK may have the right to tax the US shares/dividends and the Jersey bank account interest.
If Mr Y passes away, the UK-India DTT dealing with inheritance tax will apply. Only Mr Y’s UK assets will be subject to inheritance tax in the UK.
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