USA, a nation with a population of close to 319 million with one of the highest GDP in the world, approximately 10 times of India’s yearly Gross Products is now going around the world to find and catch her own citizens and green cardholders who earn income and accumulate wealth outside the States. In spite of having a robust structure which makes the people of United States mandatory to report their foreign income irrespective of place of residence, the country has still been suffering loses of hundreds of billions of dollars each year. In order to overcome the lacuna, FATCA was introduced in 2010 and came in full force in 2012, although it was only recently in August 2015 that it got extended to India giving a ‘big fatca’ to NRIs in the States.
There is lot of information circulating around on this subject, and which unfortunately partakes the nature of speculation when a laymen interprets it. I would not like to touch the procedural aspects of FATCA, i.e. what is reportable and what is not. That anyway is something which the Banks, Mutual Funds & other Financial Institutions (FI) will do. Instead of identifying the reporting procedures, you as a tax payer should more be concerned on the real tax impact that this regulation is going to bring to you in terms of your income and the tax thereon, and work out ways bona fide to plan it in the most effective manner.
The foremost thing one needs to understand is that India is not a tax haven. Without and before FATCA, it wasn’t like overseas residents didn’t pay tax on their income, be it interest, rent, or capital gains – these three sources primarily covering a vast chunk of income for a vast segment of overseas Indians. It would have been a different story if India were UAE, where there was no tax either way being paid, neither in the source country due to local tax legislations and nor in the resident country (US in our case) as nothing was being disclosed.
For instance, take an example of interest income. As you know that interest income earned from NRO account in India is liable to tax in India. The tax rate depends on whether you are taking benefit of the DTAA between India & USA or under the normal provisions of the Act. Let’s consider both the cases; if you are taking benefit of the treaty it would be 15% and if you do not have any other major source of income in India, you would rather chose to fall under the normal provisions of the Act and take benefit of the slab structure. Do not confuse this with TDS, which is deducted at 30% and which is just a tax deduction at source and not the tax liability per se and therefore which can be applied for a refund. Now, before FATCA coming into play, it is not that you didn’t pay tax on this interest income; even then you did. The difference now and then is that you have to report this income in US, pay tax thereon, and against it claim credit of taxes paid in India. There cannot be any ambiguity that the tax structure of US is less favourable than that of India and therefore there could be an incremental difference in the concluding tax liability, but what one needs to understand is that such a difference would not be exorbitant in most cases.
Apropos above, let’s understand the impact on rental income as there are lot of NRIs who have let-out their properties in India. In this case, it is strongly advisable that one should leverage on the treaty and not file return under the normal provisions of the Indian Income Tax Act. This is because the treaty permits and gives exclusive jurisdiction to India to tax rental income. As some of you may be aware, there is a standard deduction of 30% available on rental yields. This makes things very attractive because even after FATCA, this income cannot be made taxable in US. You may have to disclose it as a part of your foreign asset, but disclosure doesn’t mean taxability. A specific relief under the treaty is available which makes rental income only taxable in India; even the hassle of getting tax credits in US, as discussed above for interest income, wouldn’t arise.
Finally, let’s touch upon capital gains on sale of immoveable property. This is a major chunk of cash flow for NRIs abroad. Again, without or before FATCA, you need to understand that you were anyway paying a hefty long term capital gain tax of 20.6% plus surcharge @ 10% wherever applicable. It is unlike selling a property in Seychelles or BVI. Now essentially you will claim credit for this taxes paid while disclosing it locally in US. It is important to note that US doesn’t tax capital gains at some insane 30 or 40%, the tax rates have hovered around 15% unless your other taxable income is close to half a million dollar wherein the taxability on such immoveable property sales in India would also get affected.
Apparently, the only two major sources of income which will actually give a ‘fatca’ due to FATCA are long term capital gains on equity investments and fixed income accruals on NRE Fixed Deposits; the reason being both these sources of income are 100% exempt under the Indian tax laws but which unfortunately are taxable as per the US tax legislations. Even the DTAA between India and USA does not provide a shelter as the India-US treaty permits each contracting state to tax capital gains as per their domestic laws, and for interest income permits US to tax the same. There is definitely going to be some disappointment here to this extent unless effective planning is done.
Many NRI clients have been writing mails to us to work out mechanisms for avoiding the taxes. Our first advice to them is to give them a picture on an as is basis for them to take a call if they still need any tax planning. There are many ways to make an effective arrangement for tax liabilities post FATCA, however, whatever you do must be with a clear thought process; saving a few extra cents with a mala fide intent is not advisable.
[Note – this document is a knowledge sharing initiative. There are no thumb rules in taxation and therefore each problem needs a customized solution. You are therefore advised to consult your tax consultant before making any decisions. Author is associated with R. K. Doshi & Co., Chartered Accountants and may be contacted at www.rkdoshi.com]