HNIs & Super Rich (Ultra HNIs)Taxing in India
Who is HNI?
Internationally as well as in India, a person with investable assets of $1 million or more (Rs.5 cr in tier 2/3 cities-10 cr. in metros) is defined as a High Net worth Individual (HNI), and this is the criteria adopted by many investment bankers. However, primary residence or home (incl. furnishings), collectibles (antiques etc.) and consumer durables are not counted in investable assets.
As per Income tax, any individual with annual taxable income above Rs.50 lakh is considered as HNI and he/she has to provide detailed list of all assets & liabilities in their annual income tax return.
Ultra high-net-worth individuals are defined as having a net worth of at least US$30 million in investable assets net of liabilities. They are also called as Super Rich. The number of Ultra high-net-worth individuals (UHNWIs) in India is estimated to grow by a whopping 73% in the next five years, almost doubling the count to 10,354 from 5,986 in 2019, according to Knight Frank’s Wealth Report 2020.
Noise, Murmurs in India about Tax Payments by HNIs by Government
Ø Recently, Income tax dept. has revealed how many CAs, Doctors, and Lawyers declared income above Rs.1 crore in comparison to their overall numbers in the society. In the ITRs filed by individuals in last financial year, only about 2,200 doctors, chartered accountants, lawyers and such other professionals have disclosed annual income of more than Rs.1 crore from their profession (excluding other incomes like rental, interest, capital gains etc.). The number of individual tax payers who have disclosed income above Rs. 5 crore in the whole of the country is only around 8,600 whereas only 3.16 lakh individual tax payers have disclosed income above Rs. 50 lakh in FY19. Number of individuals disclosing a gross total income of more than Rs.100 crore during AY 2018-19 was 77, which rose to 141 the next year but dipped to 136 in AY 2020-21.
Ø During the last financial year, 5.95 crore individuals filed returns disclosing income of financial year 2019-20. Out of these,1.03 crore individuals have shown income below Rs.2.5 lakh and 3.29 crore individuals disclosed taxable income between Rs.2.5 lakh to Rs.5 lakh and 4.32 crore individuals have disclosed income up to Rs. 5 lakh. Around 1 crore individuals disclosed income between Rs. 5-10 lakh and only 46 lakh individual tax payers have disclosed income above Rs.10 lakh.
Ø However, Government should realise that many of these HNIs (including Professionals) have their Income in their Firm 9whether Partnership, LLP, Limited Company etc.) and thus the Firm pays the tax and not individual. Such HNI would declare most of the tax-exempt Income in their personal return such as RF share & Dividend, which has already been taxed in their Firm and there can’t be double taxation on the same Income. Most of these Professionals practice together in the Firm to address various domains & expertise required by their clients and thus would have small taxable income in their personal return. Similarly, many other HNIs have Long Term Capital Gains on Equity shares, which is exempt from taxes or they use Tax Exemptions by reinvesting proceeds or gains in alternate Investments. Such attitude of Income Tax Department’s social media posting is to scare the public and create impression that these HNIs are cheats, which is factually wrong.
Ø Tax Super Rich, a Global movement
There is murmur for a Solidarity Tax by imposing wealth, inheritance, and estate taxes, in addition to raising the income tax slab for the super-rich. Peru has proposed a ‘solidarity tax’ to mitigate the economic impact of the COVID-19 pandemic. Targeted at the wealthier sections of society whose livelihoods have been less disrupted by government-enforced lockdown restrictions, the proposed solidarity tax is inspired by the principle of solidarity. It important for those who have the most to show solidarity with those who have the least. This is a simple but potent idea. Taxing the rich is gaining traction, world over.
As COVID-19 has an unprecedented impact on people and economies across the world, policymakers, tax officials, and other stakeholders in advanced and emerging economies are exploring new revenue-raising measures to fund public expenditures on relief and recovery programs. These include fine-tuning the existing taxes as well as introducing new taxes (such as solidarity and wealth taxes) targeted at the super-rich and high earners. By adding new momentum to such tax proposals, the COVID-19 pandemic has reignited policy and academic discussions on raising revenues through new wealth and inheritance taxes, financial transaction taxes, besides reforming the international tax regime. In USA, the idea of a wealth tax is not new and many countries are already implementing such taxes with different rates. It is worth noting that growing interest in solidarity and wealth taxes is part of a broader framework of implementing progressive tax policies.
When the world is in crisis, the extremely wealthy tend to do quite well. But a group of the so-called “super-rich” want to use this privilege for public good and have recently urged governments to permanently increase taxes on them to better contribute to pandemic recovery. However the irony is that these very people pays very little taxes and hide their income in tax heavens and are advocating increase in taxes for Super-rich.
What about India?
India is a land of many paradoxes and uncertainties. While India is still home to 180 million poor people, the country has the world’s fastest-growing population of millionaires. According to a report by Credit Suisse Research Institute, there are 7, 59,000 dollar millionaires in India. The report further notes that dollar millionaires in India could number 1.2 million in 2024. According to Hurun Global Rich List 2020, India occupies the third position globally (after China and the US) with 137 dollar billionaires.
There has been talk in public domain that Indian government may bring back Inheritance Tax (earlier called Estate Duty until it was abolished in 1985) whereby the wealth transferred to family members beyond a reasonable limit may be taxed @20-30%. A report (April 2020) by a group of 50 young IRS officers suggested a hike in the tax slab for the super-rich, a Covid cess and reintroduction of the inheritance tax.
Crorepati senior executives: Overall, 901 listed companies had 1,720 officials earning more than Rs 1 crore in FY18. The list of top earners in India Inc. has more promoters, several professionals also.
In 2016, the Modi government abolished the wealth tax introduced way back in 1957. The wealth tax was replaced with an extra 2 % surcharge on the super-rich individuals with a taxable income of over Rs 10 million.
However, government slashed the maximum corporate tax rate from 30 % to 22 % and 17% to encourage setting up new manufacturing facility (that is likely to be relocating from China).
Despite experiencing higher growth rates over the past two decades, India’s Tax-GDP ratio is abysmally low primarily due to low direct tax base, parallel economy, and unorganised sectors of the economy. India’s tax-GDP ratio (excluding states’ share in taxes) was 10.9 % in 2019, far lower than the average OECD ratio of 34 %. According to official statistics, only 14.6 million individuals (less than 2 % of the population) paid income tax in India. On the other hand, indirect taxes (such as GST & VAT) impose a greater burden on poor people, thereby aggravating the already high degree of inequality in India. In recent years, there have been frequent demands to reform India’s regressive tax system and to make it more equitable.
Now, India's super-rich peak tax rate, at 42.7 is now higher than US, which is 40%.
As per the policy paper of IRS Officers, “In times like these, the so-called “super-rich” have a higher obligation towards ensuring the larger public good. This is for multiple reasons – they enjoy a higher capacity to pay with significantly higher levels of disposable incomes compared with the rest, they have a higher stake in ensuring the economy springs back into action, and their current levels of wealth itself is a product of the social contract between the state and its citizens. Most high-income earners still have the luxury of working from home, and the wealthy can fall back upon their wealth to cope with the temporary shock. In view of several European economists, taxing the wealthy would be the most ‘progressive fiscal tool’, as wealth is far more concentrated than income and consumption.”
Why increase taxes on Super Rich” in India?
As per Oxfam study, India's top 1 % bag 58 % of the country's wealth. According to the Oxfam study between 2006 and 2015, ordinary workers saw their incomes rise by an average of just 2 % a year while billionaire wealth rose almost six times faster.
Experts feel that most high-income earners still have the luxury of working from home, and the wealthy can fall back upon their wealth to cope with the temporary shock. In view of several European economists, taxing the wealthy would be the most 'progressive fiscal tool', as wealth is far more concentrated than income and consumption.
What are the tax rates for high net worth individuals in India?
Income Level Effective Tax Rate - %
Up to Rs 50 lakhs 31.20%
Exceeding Rs 50 lakh and up to Rs 1 crore 34.32%
Exceeding Rs 1 crore and up to Rs 2 crore 35.88%
Exceeding Rs 2 crore and up to Rs 5 crore 39.00%
Exceeding Rs 5 crore 42.74%
Will higher taxes for super-rich hasten their flight out of the country?
In country where income inequality has only gotten worse, taxing the rich and distributing it to the poor, sounds good on paper. There is a flip side on imposing high taxes on super rich. The capital that could have been put for productive purposes would be choked. The tax administration in India is improving, but still high taxes forces people to look at ways to evade taxes.
HNWI of India topped the list of people moving out of their countries for residence or citizenship elsewhere in 2020, according to Henley & Partners, a global citizenship and residence advisory firm. India saw the third highest outflow of wealthy individuals in 2018. Nearly 5,000 HNIs left the country, which is 2 % of the total Indian HNIs, says the Global Wealth Migration Review (GWMR) 2019 by AfrAsia Bank and research firm New World Wealth. The 2020 Global Wealth Migration Review, issued in collaboration with the New World Wealth found that in 2019, India had the second biggest ‘wealth outflow’ after China. This trend is not going to slowdown anytime and government’s decision to milk this segment will only hasten the speed. Foreign countries, especially developed ones are enticing India's super-rich by offering permanent residencies and citizenship, if they invest there. There is rush for US’s EB5 visas, ticket to permanent residency in the US, so much so that the waiting period now extends for years. Australia, Canada, UK, Cyprus, Italy, Portugal and Greece, among others, have such programmes to attract foreign high net worth individuals. To be sure, while countries like US, UK, France, Canada and Australia have high income taxes, they provide far better public services like education, health, infrastructure, environment and social security services. Adding to the degeneration of quality of life, the harassment of tax authorities and cumbersome rules to make overseas investments and buy assets outside is also hastening the flight of super-rich Indians.
There are numerous reasons for this massive exodus few of which are the safety of women and children, pollution, climate, corruption, persecution by Govt. agencies & Regulators, financial issues, educational systems (Reservations), career opportunities (Reservation), ill-practices of the Government. Typically HNIs, wants to have freedom to be mobile, they want they ability for them and their family to have assets globally, and to have a base globally. This is more about being a global citizen than trying to avoid taxes.
However for some HNIs, India is a growing economy, the return on investment on assets here would be better than any other country. Many of these HNIs are too rooted socially, economically and politically to leave the country. But, if the Government starts taxing them unreasonably high to fund their social programmes.
Why not migrate with all these chaos around?
Case for not raising the taxes on Super Rich but in fact, lowering it
While Government is currently taxing superrich at very high rates and many HNIs are migrating out of India and given the current economic slowdown, the situation has definitely changed. The need of the hour is to boost economic activity with increasing investments rather than merely collecting taxes. In this regard, corporate tax rates were slashed to historic a low to encourage investments and generate employment. Now, the logical next step would be to bring down the tax rate for individuals as well.
The super-rich are also the ones who contribute significantly to investments. A steep increase in their tax bill affects their cash flows and is thus detrimental to investments made by them. The return on these investments made out of already higher taxed income, are also subject to higher taxes. High taxes could act as a dampener especially when talent is easily mobile and could migrate to lower or nil tax jurisdictions. In view of the current economic slowdown, when the government is trying to boost the economy by providing tax relief to corporates, there is a demand to relook at the tax rates and slabs at all income levels, whereby the take home-pay increases from the current levels.
IIFL Wealth Hurun India Rich List showed that the fortune of the 953 richest Indian families was more than 26 % of the country’s GDP.
Normally, a lower effective tax rate means higher disposable income, which boosts the domestic demand for goods and services. Such a move can act as a catalyst for the revival of the economy in the following ways -
ü More disposable income provides an opportunity for discretionary spending whether for consumer durables, newer vehicles or even frequent vacations. A spurt in such activities results in enhanced demand in various sectors of the industry.
ü This would soften the cash flow challenges for small and mid-size enterprises, which presently, being sole proprietorship or partnership, get taxed at individual rates and are not favourably impacted by the recent corporate rate tax cut.
ü Higher disposable income could also boost investment, since typically the higher income group would have the tendency to invest in their own businesses or professional facilities and even immovable property. The real estate sector, which is witnessing a low demand for luxury segment could be an immediate beneficiary. It is viewed as a critical sector given its significance in providing employment and indirectly benefiting various sectors such as cement, marbles, paints etc. A booming real estate sector can trigger a domino effect on multiple industries. The tourism sector could also see a revival as super rich often spend on leisure.
How HNIs looking at ways to escape high taxes
1. An option being considered by HNIs who are promoters of firms to avoid the higher tax is to float Limited Liability Partnerships (LLPs) to obtain constancy fees from their own firms, rather than draw salary from the firms. Such LLPs could employ a few and will also have expenses to show to reduce its tax outgo. The effective income tax rate on LLPs is about 35%, which is lower than effective tax on the super-rich. Moreover, an LLP doesn’t have to pay dividend distribution tax (DDT) on payout from earnings which make it a better tax planning route than incorporating a company.
2. A trust (FPIs) converting into an LLP to avoid higher surcharge could be hauled up by the tax department under the general anti-avoidance rules (GAAR), as the entity would have to prove that such restructuring wasn’t effected solely for the purpose of tax avoidance. But the same might not be applicable for an HNI as GAAR kicks in only at a possible tax benefit of Rs 3 crore.
3. However, the options for saving taxes on account of higher surcharge are more limited for a salaried employee, who is not a promoter. An employee could at best negotiate with her employer to split the cash remuneration into part employee stock option plan (ESOP), which allows an employee to own equity shares of the company. ESOPs are taxed at the time of the employee agreeing to buy the stock; it is in the form of tax deducted at source on the difference between fair market value of stock and the actual price. At the time of sale of the stock, the proceeds are taxed as capital gains. This is not a tax-free option but defers the tax liability to a later date.
How the super-rich & Ultra HNI invest their money and opportunities for them in India
The league of Ultra HNIs is a diverse lot and has varying investing approaches. From scions of business to the new-age entrepreneurs who have built valuable businesses, their investment decisions are as varied as their business ventures. It would be a gross oversimplification to assume that they all invest in the same avenues; however, there are similarities when it comes to their investing modus operandi.
Along with economic and market cycles, the preferred asset classes also may vary. About a decade ago, real estate was a favourite for investors. Following the observance of the lack of returns from this asset class as well as under-performance for a prolonged time, there emerged a shift in preferences. Recent reports found that the HNI and ultra HNI segment are increasingly opting for financial assets, over their physical counterparts. This is also driven by ease of administration and an increasing lack of interest in the next generation for holding and maintaining large real estate holdings.
Such a trend is partly structural given the steps taken to formalise the economy and partly cyclical given the performance of the underlying asset classes. Unlike physical assets, financial assets also present the opportunity for ease of operations, as well as lower costs of the same. By using managed funds such as mutual funds for equity, and even gold (through exchange traded fund) this can bring down the cost of investment. Financial assets are also liquid, giving the investor the freedom to sell a financial security in an exchange-based setup, whenever he wants, and at the price he demands. This is in stark contrast to real estate, where liquidity could sometimes become difficult.
Having said the above if the dislocation in prices continues for some time then cyclically some components of real estate like equity investments in housing finance companies, reputed real estate companies, may become interesting options. With the advent of REITs, investors get a new mode of entering into this asset class as well.
According to a “Global Family office report in 2019,” Family Offices are realigning their investment strategies to mitigate risk (45%), increasing their cash reserves, and / or preparing to capitalise on opportunistic events (42% each).” These underline the fact that Family Offices are increasingly understanding the importance of market cycles and are willing to hold cash for future opportunities. This increasing accent towards capital preservation especially when there are signs of an economic slowdown, validates why the Family office concept has now come of age and has surpassed the product-push approach of wealth management.
CA Harshad Shah, Mumbai email@example.com