Black money law: Treaties to help expats from being taxed

But foreign workers may face harassment if they fail to report overseas assets

The Undisclosed Foreign Income and Assets Bill, 2015, requires foreign workers in India to report their overseas assets and income but experts said they could seek cover under tax treaties.

Lawyers, however, said providing tax officials the power to jail foreigners for non-disclosure of assets could lead to harassment.

“Expats are reluctant to make disclosures for the reason that their foreign income is often not taxable in India. Due to a tie-breaker clause in most tax treaties, foreign income is not taxable in India even after expats become ordinary residents,” said Ketan Dalal, senior tax partner at PwC India. India has tax treaties with 90 countries with the tie-breaker clause.

The Income Tax Act, 1961, requires an individual qualifying to be resident and ordinarily resident of India from 2012-13 to report details of foreign assets. While earlier the penalty for non-disclosure was a fine, the bill proposes imprisonment.

“The implications are wide. If an American expat in India for three years is a resident of the US under the tax treaty, his income from dividend and interest in the US shall be taxable in the US only,” said Dalal. But a tax official in India could always question the size of his house and amenities, Dalal added.

Article 6 of the US-India tax treaty states 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.

Experts said expats who might become resident in India should keep track of their overseas bank accounts and assets so that once the obligation of reporting such overseas income or assets arose, details could 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.

Resident individuals with bank accounts and 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, the spouse must file a tax return in India once he or she becomes resident in India.

Such individuals should also ensure they are not liable under the proposed law if they have not filed an Indian tax return. Experts said now was the time to review whether overseas bank accounts and assets were reported in past returns. Once the proposed legislation comes into force, correcting these details may have severe consequences.

The Bill provides criminal punishment for tax evasion and does not provide for any compounding mechanism or settlement procedures. Upon its enactment, the bill will come into force from April 1, 2015.

Experts said the government might permit a window for locals to declare their foreign assets and pay a 30 per cent tax and a penalty of 30 per cent.