The Direct Tax Code ('DTC') Bill, 2010 is proposed to come into force from April 01, 2012. This bill is yet to be passed by the Parliament and may therefore have further changes before being enacted into law. While retaining the wealth tax rate at 1%, the DTC proposes to increase the non-taxable threshold of net wealth to one crore rupees from the existing limit of thirty lakh rupees.
The DTC follows a similar approach of taxation of wealth as followed in the existing Wealth Tax Act, 1957 ('WT Act'). As per the DTC, the aggregate value of the "specified assets" as on the last date of the Indian financial year (31st March) is considered as wealth for wealth tax purposes. Any debt incurred for these specified assets is allowed as a deduction in computing the value of net wealth.
As compared to the existing WT Act, the DTC has proposed certain changes to wealth tax which might adversely affect 'Returning Indians' as well as other foreign nationals who may become tax resident in India.
Under the DTC, an individual would be considered as a Resident in India if he satisfies either of the following two conditions:
* Is present in India for 182 days or more during the financial year.
* Is present in India for 60 days or more during the financial year and 365 days or more within four years immediately preceding that financial year.
The above basic test of residence is the same as that under the current Income Tax Act, 1961. However, one important difference under the DTC is that it does not provide for the concept of 'Resident but Not Ordinarily Resident'. Instead, the DTC provides for exclusion of income outside India, if the individual has been a Non Resident in India in nine out of ten preceding financial years or has been present in India for less than 730 days during the preceding seven financial years. However, it should be noted that the above exclusion provided in the DTC does not apply to Wealth outside India.
The WT Act excludes assets located outside India from the definition of "net wealth" in case of individuals who are not Indian citizens. However, the DTC ignores the citizenship aspect and only excludes the value of assets located outside India from the definition of specified assets in case of non-residents.
In view of the above, under the DTC, returning Indians (including foreign citizens) can become Residents in India in the first year of their arrival into India and become liable to pay wealth tax on their global assets. The WT Act also has a specific relief in respect of wealth (including assets purchased by utilizing the funds brought from abroad) brought back into India by returning Indians. This exemption from wealth tax applies for seven successive assessment years commencing with the "assessment year" (April 1 to March 31) following the date on which the individual returned to India. There is no such beneficial provision under the DTC.
The adverse impact does not end here. The DTC also expands the definition of specified assets.
Among others, the new definition includes deposits in a bank located outside India and any interest in a foreign trust or any other body located outside India (other than a foreign company).
Mr. Ramaswamy, an IT engineer, was an Indian citizen who settled in the USA since last 15 years and took up US citizenship. He now decides to return to India for good. Amongst his assets in the US, he has a house there which will be used by his son who is continuing his higher education, and a bank account in US where he has saved his earnings.
As Mr Ramaswamy is a US citizen, based on the exclusion provided under the WT Act he is not liable to pay taxes in India on his US house and US bank account.
Now, let's see how Mr Ramaswamy may be impacted by the proposed DTC.
If he comes back to India during the month of August 2012 and stays in India for 182 days or more during the financial year 2012-13 he will qualify as a tax resident of India and therefore be liable to pay wealth tax on his US bank account as per the enhanced definition of specified assets (his one house in the US will continue to be exempt from wealth tax).
Even if Mr. Ramaswamy comes into India after September 2012, and is not present in India for 365 days or more during preceding four financial years, he would only be able to avoid wealth tax on his US assets for that year (assuming that he will be present in India for 182 days or more in the subsequent year).
As the DTC is still to be passed by the Parliament, it is possible that some of the above provisions relating to Wealth Tax may be amended so as not to adversely impact the multitude of Returning Indians.
Alok Agrawal, Senior Tax Professional, Ernst & Young
(Sourabh Garodia, Senior Tax Professional, Ernst & Young, has also contributed to the article. Views expressed are personal)
The DTC follows a similar approach of taxation of wealth as followed in the existing Wealth Tax Act, 1957 ('WT Act'). As per the DTC, the aggregate value of the "specified assets" as on the last date of the Indian financial year (31st March) is considered as wealth for wealth tax purposes. Any debt incurred for these specified assets is allowed as a deduction in computing the value of net wealth.
As compared to the existing WT Act, the DTC has proposed certain changes to wealth tax which might adversely affect 'Returning Indians' as well as other foreign nationals who may become tax resident in India.
Under the DTC, an individual would be considered as a Resident in India if he satisfies either of the following two conditions:
* Is present in India for 182 days or more during the financial year.
* Is present in India for 60 days or more during the financial year and 365 days or more within four years immediately preceding that financial year.
The above basic test of residence is the same as that under the current Income Tax Act, 1961. However, one important difference under the DTC is that it does not provide for the concept of 'Resident but Not Ordinarily Resident'. Instead, the DTC provides for exclusion of income outside India, if the individual has been a Non Resident in India in nine out of ten preceding financial years or has been present in India for less than 730 days during the preceding seven financial years. However, it should be noted that the above exclusion provided in the DTC does not apply to Wealth outside India.
The WT Act excludes assets located outside India from the definition of "net wealth" in case of individuals who are not Indian citizens. However, the DTC ignores the citizenship aspect and only excludes the value of assets located outside India from the definition of specified assets in case of non-residents.
In view of the above, under the DTC, returning Indians (including foreign citizens) can become Residents in India in the first year of their arrival into India and become liable to pay wealth tax on their global assets. The WT Act also has a specific relief in respect of wealth (including assets purchased by utilizing the funds brought from abroad) brought back into India by returning Indians. This exemption from wealth tax applies for seven successive assessment years commencing with the "assessment year" (April 1 to March 31) following the date on which the individual returned to India. There is no such beneficial provision under the DTC.
The adverse impact does not end here. The DTC also expands the definition of specified assets.
Among others, the new definition includes deposits in a bank located outside India and any interest in a foreign trust or any other body located outside India (other than a foreign company).
Mr. Ramaswamy, an IT engineer, was an Indian citizen who settled in the USA since last 15 years and took up US citizenship. He now decides to return to India for good. Amongst his assets in the US, he has a house there which will be used by his son who is continuing his higher education, and a bank account in US where he has saved his earnings.
As Mr Ramaswamy is a US citizen, based on the exclusion provided under the WT Act he is not liable to pay taxes in India on his US house and US bank account.
Now, let's see how Mr Ramaswamy may be impacted by the proposed DTC.
If he comes back to India during the month of August 2012 and stays in India for 182 days or more during the financial year 2012-13 he will qualify as a tax resident of India and therefore be liable to pay wealth tax on his US bank account as per the enhanced definition of specified assets (his one house in the US will continue to be exempt from wealth tax).
Even if Mr. Ramaswamy comes into India after September 2012, and is not present in India for 365 days or more during preceding four financial years, he would only be able to avoid wealth tax on his US assets for that year (assuming that he will be present in India for 182 days or more in the subsequent year).
As the DTC is still to be passed by the Parliament, it is possible that some of the above provisions relating to Wealth Tax may be amended so as not to adversely impact the multitude of Returning Indians.
Alok Agrawal, Senior Tax Professional, Ernst & Young
(Sourabh Garodia, Senior Tax Professional, Ernst & Young, has also contributed to the article. Views expressed are personal)
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