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Economy

Indians Begin To Maintain Their Relatives Abroad And Study Outside Suddenly in July, More Likely US Tax Avoidance

The US has tightened up its tax collections through the FATCA process. And India’s a signatory. Which means people who have bank accounts in India but are US citizens, or permanent residents, will see the Indian banks notifying the US authorities with all information on debits and credits in India.

This must have spooked a number of people who are technically US residents (citizens, people with a green card or a work visa) and have income in India and haven’t declared it. This used to be standard practice, and in many cases, it was quite easy to:

  • send money from the US to India – properly earned, post taxes paid etc.
  • Use the money in India to buy property or set up bank accounts and buy shares etc.
  • Not declare this to the US because hey, how will they ever know

But a chink in their plans was FATCA. It’s an act that says every financial institution in the world must try to find US taxable entities (those with a green card or US citizens or residents) in their customer base, and report any transactions of such users to the US tax authorities. If any financial institution did not, they would have a HUGE problem when that financial institution ever received a remittance from the US of any sort – in that there would be a 30% withholding tax. India as a country has signed up, so all its financial institutions must oblige.

Suddenly this earlier plan collapses. If a US person owns property in India and earns rent, that rent will attract taxes in the US (even if India has favourable laws such as a 30% write off as expenses etc). How does one handle it now?

Apparently, many people have taken the panic route. They have, it seems, gifted their assets (money or property) to relatives – tax-free under Indian law – and then those relatives have sent the money back to them as part of the Liberalized Remittance Scheme (LRS).

The ET says it:

First, they ‘gift’ their assets and investments here to ‘relatives’ (as defined under Indian income-tax law) who are staying in India. Being gifts, such transfers are tax-free in the hands of those who receive them. The second leg of the transaction involves these local residents in India remitting the amounts received as gifts back to their NRI (non-resident Indian) family members using LRS.

But How Bad Is It?

Unless you were born yesterday, you would find this situation a little abnormal:

image

July saw a ludicrously high $380 million worth of remittances.

And 1/3rd of it was: For Education Fees

According to RBI data, $113 million was remitted for “Study abroad”.

 image

While this is definitely study season, it’s not really like Indian student traffic has gone up substantially this year – the earlier limit was $125,000 per year which, to be honest, is a lot of fees. If a school charges more than that, there’s very few people that can actually afford these heavy fees. So the change is abnormal, by most standards, and given that now you don’t even need a bill from an institution (you just need to say it’s for studying) you can remit the money without any proper cross checks.

And Indians are suddenly “Maintaining Relatives Abroad”

The global economic crisis must be really bad because, after being the world’s #1 destination for remittances from abroad Indians have suddenly begun to maintain their relatives abroad now:

image

Our View: Not A Big Deal For Indian Authorities; It’s A US Problem

If anything the US tax authorities would need to take notice. There is probably zero implication of this on Indian tax authorities. If it’s money sent from India by individuals, then it’s post tax, clean money. Not “black money” which would not go through normal banking channels.

Given that FATCA is more or less applicable now, this kind of remittance will probably last only a month or two and then go back to normal levels, given the one time nature of the tax-roundtrip.

If the US tax authorities begin to act, US people with Indian backgrounds are unlikely to send money into India for things like investments. With the Indian government also keen to tax any foreign assets (as the Black Money Bill indicates), it’s becoming plain now – you can’t hide your money in a foreign country hoping your country won’t find out. Eventually, they are likely to. It’s best to just stay clean.

  • lohit says:

    In addition checkout the PFIC laws. Indian mutual funds are treated as passive financial entities. US residents holding units in Indian Mutual funds have to pay tax on an annual basis, even on unrealized gains. Tax rate is same as income tax rate.
    Say for example you held one unit of a fund worth 100Rs on Jan1, and the price rose to 120 on Dec31st. Even though you did not sell, the Rs 20 is treated as income and taxed accordingly !!

  • prabeesh says:

    Hi,
    It would be great if you provide a link or write about what should a worker/green card holder should do in these cases to stay clean.
    For example If i am a worker and send money to india and pay off home loan with that money in india and use rest of it to buy shares what should the person do to stay clean and show this transactions.

    • The only way to do this is:
      a) add the home loan in India to your assets and file the home loan details as paid here
      b) whatever shares you buy have to be declared to the US (I think they have some passive investing concept where you may be taxed on unbooked gains in your portfolio)
      c) Any taxes you pay in India (withholding tax or otherwise) can be offset against the tax payable in the US
      There’s no other way to be clean, really.

      • prabee says:

        Wow tax on unbooked gain in portfolio that seems like a too much will they offset unbooked loss too?
        I am trying to find specific cases but most sites seems to talk in general terms without real time examples which makes it difficult for a person doing simple transaction to apply correctly without tax agents help in US

        • I’m not very sure of the US tax laws, but supposedly they have some on “passive income”. Perhaps a tax agent is necessary this time 🙁 Or if someone else knows, they could chip in?

  • lohit says:

    Yes, unbooked losses can be offset. But only against the previous tax years gains. Look up PFIC taxes. Your tax consultant can help here too.
    If you are going to return to India, then the IRS provides an option to declare but not pay taxes on the passive income. The taxes will have to be paid when you eventually realise the gains. The tax rate is higher in this case, but if you are not in the US you will not be subject to it.
    However, there is an amendment in the works, which says that the IRS will treat all passive holdings as liquidated on the day you leave US. And this will likely be applied retrospectively. So better to pay the taxes upfront, and move your money out of passive assets.

  • Gold Bug says:

    There is also another rule in US. It is FBAR. If any US Resident has more than 50,000 USD in assets in India he has to report it in a seperate form in US while filing their Tax Return In US. This will also affect many Indians who are H1B visa Holders.
    As you have said it is much better to know the rules and comply with it. FATCA has made many Foreign Governments all over the World to be tax collectors for USA which is running huge deficit due to their Social Security, Medicaid and Foreign Wars around the World. So we all have to pay for the World’s Big Boss’s expenses.
    Unfortunately FIs in India will ask for FATCA declaration from Resident Indians who have no assets abroad or even not travelled to USA. If there is any link (say your son or daughter or Dad or Mom is resident in US) Banks will ask you to fill up BEN-8 form. Since they will be held responsible for non compliance. In the process many innocent Resident Indians will be unnecessarily targeted.

  • Gold Bug says:

    Correction: Please correct above comment made earlier regarding FBAR. I am quoting from US IRS actual text. It has significance for NRIs in USA.
    Quote:
    Who Must File an FBAR
    United States persons are required to file an FBAR if:
    the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
    the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
    United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

  • Gold Bug says:

    Further to my comments above I wish to chip in regarding DS post which says ” Indians begin to maintain their relatives abroad”.
    Please note even though US Visa may permit relatives to stay for up to six months, IRS rules are different.
    If you have spent certain number of days in a year and aggregate in last few years ( I don’t know details) then your relative will automatically become US Resident for Tax purposes. He has to file returns in USA. This means his Indian Income has to be reported and tax paid for in US.
    So maintaining relatives in US is not that easy as it seems.

  • shankar says:

    Hi,
    The PFIC rules have been around for ages, (http://www.investopedia.com/terms/p/pfic.asp) but most US based investors in India did not know it or thought how will the IRS ever know, but now with FATCA ‘they’ will know. PFIC investments is taxed at higher than US based investments to discourage investments which can’t be tracked by IRS. And yes most PFIC investments require one to pay taxes on appreciated value whether sold or not, dividends recd etc., Net-net from what i could get, US based investors ( be they on work visa, green card or citizens) can not invest in Indian Mutual Funds, stocks afaik are not covered by PFIC rules and hence are ok but the reporting needs to be done.

  • Mehul says:

    An interesting news report in today’s Gujarati newspaper:
    A scam was unearthed in Ahmedabad about some agents facilitating maintenance of Rs. 15 lac balance for 3 months in the accounts of students going for studies abroad, which apparently is visa requirement. They would typically charge Rs. 50,000 for this. They plug all the holes for these 3 months for students or anyone else to withdraw any money from these accounts. It seems it is done in connivance of bank officials who don’t provide any cheque book or ATM card to actual account holder but hand them over to the agents. Bank officials would also freeze these accounts so no transactions can be made. Additionally, the agents take out overdraft against this account balance!!
    Who said, idle cash can’t earn anything?