ILLUSTRATION OF NEW INCOME TAX RULES FOR NRIs
Mr. S.K Nair, a US resident, returned to India from USA after a long stint of employment. He
was in abroad for approximately 10 years, and while he was in the US, he invested in mutual
funds and shares via a brokerage account. The dividends were reinvested, and taxes were paid as
necessary in the US, as he filed a resident US return. He returned to India a few years ago when
he was deputed by his company to oversee their India operations, and he has been working here
ever since. He didn't redeem funds in his brokerage account, and the account continues to yield
dividends on his investments, though no fresh investment was made post his return to India.
Mr. S.K Nair has filed his India tax returns as a resident, since he surrendered his green card. He
hasn't reported these dividends on his India return, as dividends are exempt from tax in India,
and he assumed that this rule would apply to foreign dividends as well. Mr. S.K Nair recently
came across an article which explained in detail the provisions of the Finance Bill 2012 with
reference to assets held abroad.
NEW TAX RULES
Though the Bill is yet to be passed in Parliament, the CBDT (Central Board of Direct Taxes) has
already notified the new tax forms for this fiscal. The new rules require all residents, including
those who aren't ordinarily resident, to provide information on overseas assets owned by them.
Having filed resident returns in USA, Mr. S.K Nair is quite familiar with the provisions of the
Banking Secrecy Act and the FBAR — Foreign Bank Account Reporting in USA which requires
all US citizens and resident return filers to disclose all foreign financial assets in excess of
$10,000. In fact, 2011 onwards, US requirements have become more stringent in that all citizens
must now also file an additional form along with the US tax return, which not only discloses the
assets abroad, but also lists the income earned from these assets and the schedule of the tax
return on which the said income is listed. There is, of course, a threshold limit for the disclosure.
So now, the disclosure ties to the tax return and makes sure that foreign income doesn't escape
the tax net.
The Indian government has now embarked on a similar initiative. All resident filers (including
those who aren't ordinarily resident) must declare details of bank accounts, financial interest in
any entity, immovable property, as well as any foreign account for which they have signature
authority. So far, it seems to only be a disclosure or information-reporting requirement. While
this move may seem stringent, especially to expats whose status isn't ordinarily resident, one
must analyse the move from a wider perspective.
TAXABILITY OF DIVIDENDS
This move is an effort to curb black money and widen the tax net. On the face of it, expats may
claim that the rule is hard on them, since they aren't permanent residents of India. However, it
must be noted that the US disclosure rules are also similar — one may not be a permanent
resident or citizen but if one files a resident tax return, then one falls under the purview of the
disclosure rules. In this light, Mr. S.K Nair will need to show his foreign assets, namely the
brokerage account, and he may need to consider taxability of dividends based on the Double
Taxation Avoidance Agreement.
The Finance Bill isn't through yet, but another one of its related provisions also states that tax
assessments may be reopened for the previous 16 years, in case any concealment is detected.
There is ambiguity in this, since the normal statute of limitations requires that income tax records
be maintained by taxpayers for a period of six years only. A similar conflict also arose in the US
disclosure programme. The statute of limitations in USA is 3 years, so any adjustments to taxes
prior to that period need taxpayer concurrence.
The last Offshore Voluntary Disclosure initiative programme in the US covered a period of eight
years from 2003 to 2010. The conflict due to the statute of limitations was simply resolved by
getting taxpayers to sign an agreement to reopen assessments for the whole 8-year period, in
return for a reduced penalty framework. One can only guess that something along similar lines is
being contemplated in the Indian scenario as well.
According to the finance ministry, the provisions are aimed at residents whose global income
must be taxed in India, but there is still some ambiguity, and the CBDT may need to be very
explicit regarding the qualifying conditions and threshold limits which will be used to determine
if someone falls under the purview of these rules.
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