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Mishi Saran

SOME Indian expatriates could have reason to smile at tax time next year as their home country forges ahead with its own version of perestroika.

 A new income-tax bill, which would supersede the antiquated Income Tax Act of 1961, has been tabled in the Indian parliament and now merely awaits a new government to take the reins of the world's largest and possibly most chaotic democracy.

 Some overseas Indians might see their tax liabilities slashed under the proposal's simplified structure, but overall revenues are expected to rise.

 'The philosophy has been that if you lower taxes, then you will increase compliance,' one South Asian diplomat explained.

 This philosophy proved sound last month, when authorities concluded a tax amnesty that resulted in a potential windfall of 100 billion rupees (about HK$18.7 billion).

 Tax dodgers who confessed and paid up were promised complete confidentiality and a concessionary tax rate of 30 per cent.

 The final haul will not be known until after the tax year ends on March 31.

 'Given a chance, everyone wants to come clean,' said Yashesh Kampani, a senior consultant at Price Waterhouse Tax in Hong Kong.

 The staggering sum - 12 times more than the total collected in five previous amnesties since India gained independence from Britain in 1947 - will go a long way towards helping the government to achieve its target of limiting the fiscal deficit to 4.5 per cent of gross domestic product.

 It also will put more than 300 billion formerly black-market rupees into official circulation.

 Even so, some estimate that amount is only one-third of the black money washing about in India's economy. And even that estimate does not include funds in Swiss bank accounts.

 Of the country's about 900 million people, only about 12 million pay taxes.

 Farmers, who make up about 70 per cent of the population and a muscular political lobby, are not taxed on agricultural output.

 Similarly, many Indian expats are exempt because the government taxes according to a residency principle used throughout the commonwealth.

 'If you are a non-resident and your income is not deemed to have accrued within India, then you are not taxable,' said Chris Bevan, KPMG Peat Marwick's director of international executive tax. 'If you are a resident of India, you are taxed on worldwide income.'  Generally speaking, citizens who spend 182 or fewer days in India in any given tax year qualify as non-residents.

 Non-resident Indians, or NRIs, who have income earned in India, are subject to low, graduated rates called 'slab' rates, which range from 10 per cent to about 30 per cent.

 NRIs with investment income generated in India or long-term capital gains arising in India on shares or debentures acquired with foreign currency are liable to a 10 per cent long-term capital-gains tax.

 Under the existing system, capital gains are defined as the difference between the proceeds of an asset sale and the cost of acquisition.

 'People argued that sale proceeds partially reflected the increase in prices on account of inflation, whereas the cost of acquisition was fixed. This was tantamount to paying tax on inflation,' Mr Kampani said.

 The latest reforms provide the taxpayer with an option to fix the cost of acquisition at 50 per cent of the sale proceeds.

 What is more, gains on assets sold after more than eight years will be calculated at 40 per cent of the sale price.

 'If, for example, you sell shares in Indian companies for 100 rupees, the capital gains would amount to 40 rupees, and 50 per cent of that would be exempt,' Mr Kampani said.

 'So you are only paying tax on 20 rupees of your sale price. And at a rate of 10 per cent, that amounts to an effective tax rate of only 2 per cent on your sale price.'  The tax bill also includes a radical property-tax provision that will affect overseas Indian buyers and sellers.

 The plan is to withhold directly 6 per cent of the purchase price.

 'So if you sell the property for 100 rupees, you get 94 rupees in cash. This is tax deduction at source,' Mr Kampani said.

 'Of course, you will still have to file your tax return to determine the final tax liability.'  In the past, tax collection has been held up, often for decades, while litigation dragged on over the valuation of a property.

 The government hopes the new system will boost property-tax revenues.



Indian expats win reason to smile as tax rules change