MUMBAI: Is the American dream losing its appeal? Though the US still continues to attract the best minds from the world over, including India, stringent tax laws are forcing many Indians to re-look at the decision to settle in a land that has for long been their dream destination .
This is reflected by the increasing number of Indians wanting to give up their green cards or US citizenship after the country’s heavy budgetary deficit and a drive to trace unreported income through tighter tax laws and disclosure norms.
Tax laws in the US empower the Internal Revenue Service, the apex body for US tax administration, to tax global incomes of those holding US citizenships or the green card. As a result, Indians who hold a US citizenship or green card, face the threat of being taxed in the US for income generated in India, even if the Indian business has no territorial nexus with the US.
For example, many Indians in the US send money back home, which is invested in the stock market in India, where dividend and long-term capital gains are tax exempt.
Nevertheless, they are liable to pay tax in the US for income generated in India. According to reports published internationally, over 500 US citizens had given up citizenship in the last quarter of 2009, to settle in convenient destinations. This figure was almost double the number of people who severed ties with the US in 2008.
“It’s is true that several clients are giving up US citizenships,” said Sudhir Kapadia, a partner with consulting major Ernst & Young. “A major reason is the stringent tax laws. With rising budgetary deficits, their tax laws are increasingly becoming stringent. And more such laws are in the offing. From 2011, Inheritance Tax, at the rate of 20%, would be levied on heirs of US citizens. Many Indians are wary of such laws,” Mr Kapadia said.
There is another side to this development. Even if a person is not residing in the US, he is liable to pay tax if he holds a green card or has citizenship. In other countries, for example India, a person is bound to pay tax in the country if he resides there for more than 182 days in a year. However, the number of days a taxpayer resides in the country is irrelevant for the purpose of taxation in the US. What matters is whether he holds US citizenship or a green card.
Although these laws have been in force for some time, it was only two years back that the US government decided to strictly enforce them after the government detected unreported accounts of US citizens with the Swiss bank, UBS. Ever since, the US administration has initiated the project to collect as much data as possible about the global income of US citizens not reported to the Internal Revenue Service.
“For many Indians who hold green card or have US citizenship, America has ceased to be attractive,” said Dilip Lakhani, a Mumbai-based senior chartered accountant, who advises green-card holders doing business in India. “Many do not know they have to pay tax in the US for their Indian income. If they continue ignoring the requirement, they may land up in jail in the US. My advise to them is to comply with the US laws.” Defaulters will be in jail for at least six months.
A number of chartered accountants, who don’t want to be identified, said they have even advised their clients against going to the US for delivery of children. “These are from well-to-do clients for whom US tax laws would become a liability later in life. Most of them complied with the advice,” said a chartered accountant. Indians with green card or citizenship in US also find having to reporting foreign accounts with deposits of $10,000 or more
highly irksome.
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