US and India Taxation

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18949788.cmsDear e-commerce expat,

So you moved to India to join the e-commerce boom, you get to deliver packages during the day and tweet selfies all night. My only advice to you is get your financial house in order. In the weeks and months before you moved to India, I’m sure several people asked you “do you have to pay taxes in both countries?” The short is no, the long answer is – it’s complicated.

Why is it complicated? Because if you are a U.S. citizen and moving to India, you are essentially stuck between two countries that are absolutely obsessed with milking you for every dime that is owed to them. It’s justifiable, but let’s rewind and understand how we got here and go over the basics of each countries tax regime.

U.S.
The U.S. national debt is at over $18 trillion dollars and many of the largest corporations like Apple, Microsoft and Cisco Systems have kept their profits offshore and refuse to repatriate (fancy word for bring) the funds to the US and pay taxes.

The Internal Revenue Service (IRS) is the government agency that collects the taxes. The tax year is based on the calendar year (January 1 to December 31, 2013) and for individuals, the taxes are due on April 15, 2014 based on the example. They refer to the different rates of taxation as “tax brackets”. The IRS is sometimes referred to as Uncle Sam. If you are a U.S. citizen or resident alien, your worldwide income is subject to U.S. income tax, regardless of where you reside.

In 2010, the US passed the Foreign Account Tax Compliance Act (FATCA). This made it mandatory that all non-US financial institutions automatically report if they have accounts for US citizens and report that information back to the US authorities. But, why let the institutions have all the fun? Individuals still need to file Form 114 – Report of Foreign Bank and Financial Accounts (FBAR). An FBAR filing is required if all foreign financial accounts exceed $10,000. In addition, a Form 8938 – Statement of Specified Foreign Financial Assets is required if you have assets over $200,000 during the year. The amounts vary, depending on whether you are single, married or filing seperately.

India
In India, the issue is with a cash based economy and corruption. When people pay for services in cash, the government has no way to track it and thus people avoid paying taxes. With corruption, much of the money that is meant for government programs for the poor gets siphoned off and put into off-shore bank accounts.

The Income Tax Authority is the government agency that collect the taxes, it’s part of the Ministry of Finance. The financial tax year is based on April 1, 2013 to March 31, 2014 for example. Individual taxes are due on July 31, 2014 based on the example. They refer to the different rates of taxation as “tax slabs”.

In 2015, the Indian government passed the Black Money (Undisclosed Foreign Income and Assets) Act. It’s commonly referred to as the “Black Money Act” and the intent and spirit of the law was to go after politicians and large businesses that for years had stashed their money in foreign countries. The deadline to declare ANY and ALL foreign assets was September 30, 2015 and the results were less than stellar. Many of the people that declared their assets were working professionals and not the intended target of politicians and large businesses.

It’s Complicated
The US and India do have a Double Tax Avoidance Agreement (DTAA) in place and for the most part works. So if you make the equivalent of USD 100,000 in India, then India will tax you at 30% and the US will not double tax you because of the DTAA that is in place. However, if you make the equivalent of USD 500,000 in India, then India will tax you at 34% (30% + an additional 10% surcharge on 30% + an education tax of 3% on the entire tax amount). In the US, since the highest tax bracket is 39.6% you will have to pay the delta of 5.6% to Uncle Sam.

Suppose you have a 401k retirement plan which allows you to generate income within the account tax free and pay taxes at the time of distribution. Unfortunately, according to the DTAA between India and the US, India does not recognize the account as a pension so you will have to pay taxes on the income generated in the account to the Indian government. 🙁

Another example, suppose you buy an equity mutual fund in India and after 13 months you sell it. In India, there is no long-term capital gains on equity mutual funds – awesome right? Wrong, since you hold a US passport you will have to pay long-term capital gains in the US based on the US tax bracket you are in.

So technically, there is no double taxation but you will get taxed at the highest rate whether it’s in India or the US. DTAA should really stand for Double Trouble And Anguish.

An Example
Suppose you earn Rs. 78 lakhs for April 1, 2014 to March 31, 2015 for the work you have done in India. That is Rs. 6.5 lakhs a month and at the current exchange rate comes to USD 10,000 a month. In India you would fall under the 30% tax slab and in the US you would fall under the 28% tax bracket. You will first have to file your US taxes which are due on April 15, 2015. Since you earned USD 90,000 over the 9 months you fall under the Foreign Earned Income Exclusion which means the US government won’t tax you on anything. You will need to look at Form 2555 and Form 1116 for Tax Credits to see which makes more sense for you.

Then when you file your Indian taxes on July 31, 2015 you will report the Rs. 78 lakhs on your ITR (income tax return). You will have to show the long-term capital gains on your Indian taxes in Schedule TR which is for taxes paid outside India. And of course you will need to fill out the Schedule FA for foreign assets. If on February 10, 2015 you have a short-term capital gains of Rs. 5 lakhs, your tax will be Rs. 1.5 lakhs which is 30%. Then when you file your US taxes for calendar year 2015, you will have to show the gains and the credits will be listed on Form 1116.

Yeah, it’s almost better to be just a delivery person in India.

Fighting Your Inner Fear

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fearJust 12 months ago, the venture capital funding environment in India was white hot. Anything and everything was getting funded. FOMO (fear of missing out) was everywhere, VCs didn’t want to miss the next Flipkart or Ola, so they opened up their checkbooks and just wrote check after check after check.

Then about 6 months ago, the markets started to turn and you would hear VCs talk about “unit economics” and asking startups about their path to profitability. These conversations were a bit awkward for those that were already in fund raising mode because overnight their decks had to change from “be present in every city at any cost” to “scale into new cities if the metrics make sense”.

Now, we are at a point where previously funded startups are having a very tough time raising a follow-on round. And, fear has set in. Fear is what holds most people back. Fear of speaking in front of 200 people, fear of asking a question at a meeting or fear of making a decision because of the implications, etc…

I believe your ability to manage your fear is what distinguishes successful people and separates the winners from the rest.

Many of the autobiographies I have read or the 100’s of startup podcasts I listen to, rarely talk about it. Instead, it’s always about a person’s connection, their college degree, their domain knowledge, their ability to identify a great market, etc… However, in any of these situations you will always run into roadblocks and at times you feel your startup’s progress is in jeopardy and then fear starts to creep in.

Over the past month I’ve fielded several calls from entrepreneurs who fear the current fund raising environment will kill their startup. They are not sure what to do, so I ask them what they are doing? The more they talk, the more it sounds like fear has set in and they are just doing busy work and hoping things will turn around.

That is absolutely the last thing you want to do. You might have what seems like an endless list of “shit that can go wrong”, forget that list and focus on the issues at hand. Such as get your app out there, focus on marketing, talk to your top 10 customers and understand their needs, etc… You should be fighting your inner fear head-on and doing things that are outside your comfort zone. That’s what makes someone successful vs. someone that is always talking about woulda, shoulda, coulda.

A Decade in India

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passport
tl;dr
(too long, didn’t read)

The original plan was to land into Bombay on October 1, 2005 and stay for 6 months…I’m still here 10 years later. In what can be termed the longest 6 months ever.

The long version

I landed into Bombay on Oct 1, 2005 and thought I would be back to the shores of California by April 2006. But, life had other plans for me. Just to refresh your memory, what was happening around October 1, 2005:

  • USD-INR was Rs. 44
  • Sensex @ 8634
  • DJIA @ 10,658
  • NASDAQ @ 2151
  • The big song in India was Kajra Re from the movie Bunty aur Babli
  • Louisiana was still reeling from the after effects of Hurricane Katrina (Best quote “Brownie, you’re doing a heck of a job”.)

I’ll be honest, I never expected to last 10 years in India. I used to come to India during the summers as a kid and I would always complain about things not working right, things getting delayed or it smelling. One thing is for sure, some things never change!

Cousins, friends and business associates will ask me from time to time “are you happy in India”. Living in India has it’s own set of pros and cons just like living in the US does. However, after 10 years I can categorically say yes – I like India. The reason is very simple, living in India is an adventure. You will never know what to expect and everyday there is some new thing to deal with. For some, this environment just doesn’t work well if you want things to be consistent, straight forward and proper.

Don’t get me wrong, there are days where I have to shake my head and say to myself “I moved here for this crap?” Such as the recent kerfuffle regarding encrypted internet communications. The Government of India, in their infinite wisdom wanted individuals to save their previous 90 days of chat messages in clear text in case the government requested them. To call this idea stupid would be an understatement, it’s the type of half-baked policy that many Indian government agencies roll out and then quickly back pedal because they didn’t think through the process.

Anyways, they call India an emerging market for a reason. Lots of opportunity, but also lots of issues to deal with you. As I say “if it was easy, everybody would be doing it.”

The Disconnect Between Modi and Me

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modi-digital-indiaYesterday, India’s Prime Minister Narendra Modi (@narendramodi) visited ground zero for the home of many unicorns – Silicon Valley. Modi hosted a Digital India dinner to show that India wants to roll out the red carpet for companies to invest in India. Modi is an articulate salesman and its just want India needs. Someone to get out there, cold call, visit countries and get them excited about India and it’s 1.3 billion people.

When I used to live in the US, a colleague of mine at Cisco Systems would always tell me – never confuse selling with installing. In his eyes, they were two distinct activities handled by different teams. The selling was done by the sales guy and the installing was done by someone else. Of course, you really need to make sure the entire process works well or they may not buy again.

Since Modi assumed the office in May 2014 he has been busy trying to handle both sides of the equation. Traveling all over the planet in Air India One selling the vision of India and getting companies to sign on the dotted line for foreign direct investments (FDI). In India he has been battling the Congress party to get many of the needed reforms in place such as the land acquisition act and GST (Good and Services Tax).

For the uninitiated the GST bill will unify the tax code and shifts the power from the States to the Central Government. Currently, each State collects various taxes if you manufacture products and if you move goods from one state to another, it’s like moving it to another country. With GST, the Central Government handles the taxation piece and goods can freely move from state to state, which would be the logical thing to do. Of course, this creates an issue because the guys on the ground that used to get bribes to move the paperwork more quickly are effectively cut from the action.

There are many rules and regulations that need to be passed in order to get India moving in the right direction. Another example is if you are trying to open a restaurant in Bombay, you need over 40 licenses in place to be compliant. My favorite is you need a phonographic license to play music in your restaurant. You can imagine dealing with over 40 departments for running a restaurant will definitely lead to some policy violations and those representatives are all to happy to show up asking for a bribe…welcome to India.

I’ve talked to many people that run manufacturing facilities and they all say the same thing, the Make In India initiative is a joke. The disconnect is Modi is absolutely selling the vision of India but the implementation of policies to operate in India is still stuck in neutral. Fix that.

 

1 Year of Modi

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narendra-modi-one-year-LIt’s been a year since Narendra Modi was selected as the Prime Minister by his party – the BJP. During the election campaign his slogan was:

Achhe din aane waale hain

Which translates into “good days are coming”. Well it’s been 1 year or 20% of his 5 year term and I would say most people feel the good days still have not arrived.

During the run up to the election, I kept on comparing Modi to Obama in that both countries were betting that a single charismatic speaker could turn around the fortunes of a country. That comparison of Modi vs. Obama did not go down well with most supporters of Modi. They kept on referring to his 13+ years as Chief Minister of the state of Gujarat and turning it into an economic powerhouse. Obama’s campaign slogan was “Hope” and everyone jumped on the bandwagon (me included) but when I look back at what he has achieved it’s pretty disappointing. It’s partisan politics as usual which means nothing is getting done.

Back in India, Modi is facing the same issue with partisan politics and that logjam is stifling the country. Two big bills Modi and the BJP are trying to pass are the Land Acquisition bill and the GST (Goods and Services Tax) bill. Every week that passes without resolution is another delay that the country cannot afford. The reasons for the delay are very much related to money. With the passage of the GST bill, the state governments no longer collect the money directly but get the money from the central government. It’s a bit like working and getting your own paycheck vs working and the money getting deposited into your parents account who in turn give you an allowance. As you can imagine the state governments that are not under the BJP government are not to happy about this and pretty much stopping every piece of legislation.

Of course, when you speak to a BJP party loyalist they will tell you the previous UPA-led government spent the last 10 years trashing the country and that takes time to fix. I do buy that argument. It’s probably like crashing your car and then expecting the repair shop to fix the car in a day.

However, what is frustrating are some of the proposed changes that have been leaked to the press. One such proposed change is that any international trip must be documented in your tax return. Yes, every time you travel you must document every expenditure down to a taxi receipt because they want to know where the money came from. I can only imagine the conversation that ensued when the idea was hatched:

Babu 1: Let’s track everyone’s international travel

Babu 2: Okay, when they book an airline ticket we can ask them for their PAN card number

Babu 1: That means we have to work with all those airlines to add another field to the booking engine, that seems like a long process

Babu 2: Okay, then why don’t we add a line in the ITR (Income Tax Return) form

Babu 1: Done.

Babu 2: Of course that means a lot more paperwork for the taxpayer, but who cares

As expected, the government has still has not decided what they plan on doing about documenting international travel even though tax returns are due at the end of July…so India.

The only people that are celebrating the good days in India are the ones that are benefiting from the VC gravy-train of money – startups, recruiters, Android developers, iOS developers, marketing firms and advertising outlets. Otherwise everyone else is still waiting for the good days to come.

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