Business Line : Features / Mentor : Where there is a will…

Business Line : Features / Mentor : Where there is a will…

A will has legal acceptance, even if it is written plainly on white paper with no formal style, with just two witnesses.

March 18, 2012:  

It was during the recent visit to USA, that I came across a shocking situation. A middle-aged couple from Gujarat, who were relatives of my client, had recently passed away in a tragic car crash.

They had moved from India and settled in USA almost a decade ago for a software job, and both of their children are natural US-born citizens. The grandparents hurried to USA and took care of all formalities, including the funeral and last rites.

When the time came to claim the children and arrange for them to return to India, they were in for a shock — the US Government had placed the kids in foster care already.

Further enquiries revealed that only a court of law could decide if the children remained in foster care or went with the grandparents, because the parents hadn't written a will designating a guardian for the children, in the event of something happening to both of them.

The fact that the children lost both their parents in a horrifying accident was tragic enough, but making the matter worse was the fact that the parents died intestate, and thus, the custody of the children became an issue for the courts to decide.

Yes, sadly enough, if a person dies intestate in USA, and has young children, and the remaining parent is also deceased or unavailable, the courts will determine who gets custody of the children.

What a tragic situation for the children to be in! Coping with losing both parents is bad enough, without the added trauma of settling into a foster home and adjusting to an alien culture until the court can make up its mind on where they should go, and who should care for them.

LEGAL DECLARATION

Undoubtedly, social systems differ from country to country. Foster care is a common procedure in USA, but alien to Indian culture. While we aren't judging the correctness of foreign social rules, one cannot help thinking that a simple thing like a will could have made a lot of difference to those kids. Eventually, the court did grant the grandparents' custody of those children, with the intervention of the Indian Embassy, but a will could have prevented a long wait, and astronomical legal expenses.

A will is a simple enough legal declaration, by which a person provides for the transfer of his/her property at death. Perhaps, because of its association with death, it is a document that most people postpone drawing up, especially in India.

Due to its association with death, it is considered inauspicious. However, not drawing up a will these days is more inauspicious. If someone dies intestate in India, something as simple as transfer of a phone line or an LPG connection requires that the nominee prove he/she is a legal heir of the deceased in addition to getting letters from the remaining legal heirs. People also desist from discussing this issue with their parents, in view of their sentiments and the inauspicious tag attached to a will.

ASSETS FOR THE FUTURE

Unless the older generation, for some reason, seeks professional advice and comes across a professional consultant who provides the right advice, they don't foresee such issues, and are, therefore, blissfully ignorant of them. In their belief that they are leaving assets for their children, and that they have provided for the prosperity of the family, they unknowingly leave behind many a legal tangle. A will has the legal acceptance, even if the Testator (who writes the will) writes on a white paper with no formal style, with two witnesses, and which is ambulatory & revocable during his lifetime to accommodate change of events such as birth, marriage, divorce, family chemistry, wealth variation etc.

‘Where there is a will there is a way' goes an old English adage. Someone made a witticism out of it and turned it around to state ‘Where there is a will… there are many worried relatives' To top it all, however, where there is no will… there are umpteen legal hassles.

(The author is a Coimbatore-based chartered accountant.)

Compliance aspects of inward remittance

Any company setting out to receive foreign share capital has to know what percentage of investment is allowed in that industry by the Government.

An auto component manufacturing company from Korea was on the lookout for a suitable joint venture partner to set up a facility in India that would logistically support supply to the car manufacturer in Chennai. After conducting due diligence, the Korean company identified Anish Southern Group companies as an ideal venture partner, with whom the procedures for incorporation were set in motion. The new joint venture company, comprising both Korean investors and Indian investors, was incorporated with the Registrar of Companies with 49 per cent of equity investment by the Indian investor, and 51 per cent investment from the Korean investor.

The company opened the bank account with a private sector new generation bank, through which the funds were routed from Korea to India, and the branch of the bank is an Authorised Dealer (AD) of RBI. The AD secured KYC documents on receipt of the inward remittance, but didn't follow up on some other FEMA-related requirements for foreign inward remittance. The company allotted shares to all investors, and complied with ROC formalities by filing Form 2. The initial focus was on operations, and meeting its orders and augmenting supply chains and logistics to further strengthen its hold on the market. During the first audit of the books of the company, the auditors sought FEMA compliance papers for verification of the foreign share holding. At this point, the JV Company realised that they had unintentionally missed out on this aspect of the deal.

SECTORAL CAPS

Whenever any company sets out to receive foreign share capital, certain essentials need to be verified. It needs to know what percentage of investment is allowed in that specific industry under the Government of India's FDI schemes, and one needs to verify that the industry doesn't fall into the list where the Government has set sectoral caps or limits on foreign investment. There are three such categories — where 100 per cent FDI is allowed, where sectoral caps exist, and last but not the least, where FDI is absolutely not allowed. Further, there are industries where investment is allowed via the automatic route — in other words, only information reports need to be filed with the Reserve Bank of India. In certain other cases, prior approval of the government is required, and must be secured from the Foreign Investment Promotion Board (FIPB), Government of India.

The JV Company, having received FDI under the automatic route, should have reported certain details on the Advance Reporting Form to the Regional Office of the Reserve Bank of India, within 30 days from the date of receipt of inward remittances. The report would include details of the receipt of remittance towards issue of equity instrument (viz. shares / fully convertible debentures / fully convertible preference shares), copies of the Foreign Inward Remittance Certificate (FIRC) evidencing the receipt of inward remittances, and Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount.

ADVANCE REPORTING

The procedure may be classified into two stages. Stage 1 happens on the receipt of share application money, and should be completed within 30 days of receipt of remittance. Stage 2 is due when shares are allotted. At that time, the JV Company needs to file a report on form FC-GPR with the respective regional office of the Reserve Bank of India.

This report must be accompanied by certain certifications from the Company Secretary and Statutory Auditors of the JV Company. Another point to be noted is that all the reporting happens through the AD category 1 branch of the bank where the company has an account, and which receives the remittance of share capital. It is, therefore, imperative that the AD keeps its customers informed of FEMA requirements in such cases.

In this case, failure to report the transaction will invite penal provisions under FEMA. The JV Company would need to apply to RBI for compounding of contravention under FEMA. One can also make an application for compounding, suo moto, on becoming aware of the contravention. It would, of course, be better to follow reporting requirements, rather than invite penal provisions, as these types of irregularities will dominate the horizon when the foreign investor wants to repatriate dividends or capital on a later date.

Voluntary disclosure for foreign assets

Article by Mr. Karthikeyan in The Hindu Business Line dated 01.02.2012:

Mr X, an industrialist, constantly looks out for news items for a possible offer of a Voluntary Disclosure scheme by the Government, especially involving offshore assets. Mr X has funds stashed away in tax havens such as Switzerland, and is aware that he is incorrect in not disclosing the income abroad. No doubt, any voluntary disclosure scheme not only reduces the morale of the honest tax payers, but also gives a signal to dishonest ones that they can wait for the next voluntary disclosure scheme. India has witnessed no less than three voluntary disclosure schemes in the past three decades. The last such offer, the Voluntary Disclosure of Income Scheme (VDIS) 1997, was conceived to fight internal black money generation — an unconventional, but successful tool.

More than 350,000 people disclosed heretofore undisclosed income and assets under the scheme, and brought Rs 7800 crore in additional revenue to the government. Though it was considered a successful scheme, it must be mentioned that it was criticised for putting the rationale of timely and honest tax payment to question.

OFFSHORE INITIATIVES

Apart from India, many countries, such as the US, UK, Germany, France, Portugal, Israel, Greece, and South Africa have introduced voluntary disclosure programmes in the past, and some of these countries have done it more than once. Also, a majority of these voluntary disclosures were offshore programmes aimed at bringing back funds stashed outside the country. In this context, it is relevant to go through the details of two such amnesty programmes introduced by one of the biggest economies — the US, that too within a short span of three years. The first was called Offshore Voluntary Disclosure programme 2009, and the second, Offshore voluntary Disclosure Initiative 2011.

As per US Treasury rules, it is mandatory for all its citizens to disclose annually the details of financial accounts held abroad. Additionally, any income from these accounts must be disclosed in the tax return. The Bank Secrecy Act regulations requires that all US citizens with foreign accounts file Form 90-22.1 – Report of Foreign Bank and Financial Accounts (FBAR), if the taxpayer has an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in a foreign country, with an aggregate value of more than $10,000, at any point in a calendar year.

The penalty for failing to file an FBAR includes comprehensive civil fines, imprisonment of up to 10 years, or both.

PENALTIES

The Internal Revenue Service (IRS) came out with the first voluntary disclosure programme during 2009, and the subsequent one during February 2011. The latest disclosure required that taxpayers file 8 years of back tax returns, reflecting unreported foreign source income, calculate interest and penalties each year on unpaid tax, and apply a 25 per cent penalty on the highest balance of the undeclared financial accounts in the past eight years.

As many as 16,550 taxpayers availed this amnesty opportunity to avoid criminal prosecution. The very fact that the penal provisions, even under amnesty, are harsh, acts as a deterrent, and makes most taxpayers toe the line in future.

None of the past amnesty programmes in India had harsh penalties or steep tax rates unlike other countries, but the Indian Government was able to collect some much-needed revenue. Though the current scenario has enabled the Government to fix tax evaders with reliable data and with favourable clauses introduced in the Double Taxation Treaty with Switzerland etc., unless a strong political will is demonstrated, desired funds stashed overseas may not be easily brought back.

Setting aside the morality of the idea of allowing tax evaders to escape criminal prosecution, such offshore voluntary disclosure (with a high tax rate and penal provisions) will attempt to bring back illicit funds to put them to good use, rather than losing them altogether. With a slowing economy in the backdrop, much-awaited infrastructure projects need to have funds pumped in from the fiscal system.

An additional fact that might encourage such taxpayers is the current appreciation of the dollar, which might well offset the penal effect of the disclosures by bringing in more money on conversion.

(The author is a Coimbatore-based chartered accountant.)

Business Line : Features / Mentor : Practical hurdles to credit of foreign tax

Business Line : Features / Mentor : Practical hurdles to credit of foreign tax

The Online Tax Accounting System in India doesn't recognise the foreign taxes paid in a different country.

November 27, 2011:

Ranjan Gupta had to file his India tax return that included his UK income after a short deputation to London on a company assignment. Ranjan stayed in UK for 4 months during the financial year, and the balance in India, thereby becoming a resident in India. He was paid salary in UK by the parent company during his deputation, and tax was accordingly deducted there.

As a resident, the global income must be offered to tax in India, though he is entitled to avail tax credit on the India return for the foreign income taxes paid in UK. This is perfectly in tune with the double taxation treaty between India and UK. So, what is the challenge now?

ONLINE SYSTEM

The Income Tax department, in recent years, started processing the tax returns through its integrated software for all the returns filed by the taxpayers. The way this software is designed, it accepts the total income of the taxpayer as declared on the tax return; however, it does not recognise the foreign taxes paid in a different country. The tax payer is given credit towards his tax payable only if it is reflected in the Online Tax Accounting System, to be approved by the Assessing officer. It has provisions only for advance tax, TDS or self-assessment tax. In view of this, the practical situation is that whenever such returns have been filed, including global income and taking a credit for foreign taxes against the tax payable, the tax payer ends up receiving a demand notice from the Tax department, as the software doesn't find a match for the foreign tax credit.

Subsequently, the tax payer has to undergo the rigorous process hassle of filing a rectification petition under Section 154 of the Income Tax Act, to validate the situation.

Ranjan Gupta's is not a unique case, but applicable to several software professionals who are deputed to various countries for a part of the year, and who are paid in foreign countries during their stay there.

Many employees are deputed under L-1 Visa or H 1 B Visa for a shorter duration, for a specific assignment to US destinations. The salary is paid by the parent or subsidiary company in the respective country, for which tax is withheld in the respective country for that particular portion of the salary.

These tax payers need to file the India tax return, including their global income if he or she stays more than 182 days in India, and claim credit for the foreign taxes paid.

FOREIGN NATIONALS

The situation looks worse when a foreign national is deputed for longer assignments in India, and becomes a resident in India for a particular year. He needs to declare global income in India and avail the foreign tax credit for the foreign portion of withheld taxes.

The glitch makes it difficult to get the right credit for the taxes paid in total and also puts the tax payer through a convoluted procedure of filing a corrective reply to the IT department's initial demand notice, and explaining the details of the peculiar situation.

While the automation initiatives of the Income Tax department in India are laudable, anomalies of this kind leave a bad impression in the minds of global trotters, especially non-resident tax payers.

Though the paper return forms have a column for the claim of foreign tax credit, the tax software matches only the bank information available in terms of TDS / Advance tax / Self-assessment tax. A way must be found out of this impasse, since the credit for foreign taxes forms the backbone of the double taxation avoidance agreements that India has with various countries.

(The author is a Coimbatore-based chartered accountant & the Managing Director of GKM )