US and India Taxation

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.