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Tax treaties to help expats from getting taxed under black money law
April, 02nd 2015

The expatriates working in India have reasons to worry. The new Undisclosed Foreign Income and Assets Bill, 2015 has made it mandatory for the foreign workers in India to report their overseas assets and income but tax experts say they can take cover under the tax treaties for not paying tax in India. But giving powers to tax officials to jail foreigners for non-disclosure of assets will just lead to harassment, fear tax lawyers.

“Expats are reluctant to make disclosures, including for the reason that their foreign income is often not taxable in India, due to a tie-breaker clause in most tax treaties that India has entered into; such treaties often lead to the effect of foreign income not being taxable in India even after they become ordinary residents," said Ketan Dalal, Senior Tax partner, PWC, India. India has signed tax treaties with 90 countries with almost same framework which has a "tie-breaker" clause.

Under the existing provisions of Income Tax Act, 1961, an individual qualifying to be resident and ordinarily resident (ROR) of India is under an obligation to report details of foreign assets (including financial interest in any entity) in his or her income tax return applicable with effect from financial year 2012-13. While earlier the penalty for non-disclosure was just a fine, tax experts now say failure to report their overseas income or assets accurately could lead to potential jail term under the proposed bill.

“The implications are wide ranging. For example, if an American expat is in India for three years and is a resident of US under the tax treaty, then his income from dividend and interest in the US shall be taxable in the US only,” said Dalal. But a tax official in India can always raise queries on the size of the house, amenities in the overseas property - just to harass an expatriate.

The Article 6 of US-India tax treaty makes it clear that the income derived by a resident of a contracting state from immovable property, including income from agriculture or forestry, situated in the other contracting state may be taxed in that other state.

But tax experts advise that expats who may become residents in India in the near future should keep track of their overseas bank accounts and other assets so that once the obligation of reporting of such overseas income or assets arises, the details may be reported accurately.

"There are many cases where the Indian tax authorities have raised queries on expats’ foreign assets who had filed their returns properly here. The bill will lead to additional queries by the tax authorities as it has rigorous provisions for non/incorrect reporting of foreign assets/income ," said Sundeep Agarwal, Director – International Assignment Services of PWC. "The bill is meant to uncover illegal wealth abroad of Indians and it should not be used to harass expats who are working in India," said he.

Under the existing provisions, resident individuals with bank accounts and/or assets in a foreign country are required to file a return in India even if they do not have any taxable income. If an expatriate employee is accompanied by a spouse with assets in his or her home country, then the spouse is under the obligation to file a tax return in India once he or she becomes resident in India.

Such individuals should also review their financial affairs to ensure that they are not caught inadvertently under the new proposed law if they have not filed an Indian tax return.

Experts warn that now is the time to review overseas bank accounts and assets and ensure that they were properly reported in past returns. If not, now is also the time to correct the reporting because once the proposed legislation comes into force, there could be severe consequences. The Foreign Assets Bill provides criminal punishment for tax evasion practices and does not provide for any compounding mechanism or settlement procedures for offenses. Upon its enactment, the bill will come into force from 1 April 2015.

Experts say the government may come out with a window to give opportunity to the locals to declare their foreign assets and pay 30% tax thereof and a penalty of 30%.

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