'Permanent Cost?' EY India Analyst Flags Concern For NRIs On Trump’s Proposed 5% Tax On Remittances

Speaking on the implications of the proposed 5% tax on international transfers by non-citizens in the US, including H-1B and F-1 visa holders, EY India's Mayur Shah said it needs to be seen how this works out — "whether it's creditable or permanent cost".

In a conversation with NDTV Profit on Thursday, Shah, who is tax partner at EY India, compared the Donald Trump-led administration's proposed tax with India’s tax collected at source or TCS regime, and flagged potential concerns for non-residential Indians.

"The US proposal introduces a 5% tax on outbound transfers made by non-citizens, such as H-1B and F-1 visa holders. In India, a similar mechanism exists in the form of TCS on foreign remittances under the LRS. However, unlike the proposed US tax, TCS is allowed to be set off against the taxpayer’s overall income-tax liability," Shah said.

"If you look at India, when you remit under LRS, you pay TCS, which is creditable against the taxes you are required to pay on your income. But we really need to see how this works in the US. If it’s not the same, then it will be a challenge—especially under a double taxation avoidance agreement—whether the home country will allow credit for such taxes paid or not. Or is it going to be a permanent sunk cost? That needs to be seen," he added.

"There are two residencies we need to examine," Shah pointed out. "First, under the domestic tax law of India, residency is based on physical presence or citizenship. There’s a category of resident and ordinarily resident, where you’re subject to tax on your global income."

"Second, you could be resident but not ordinarily resident. In that case, your income that is accrued or arising outside India—and also received outside India—is not subject to tax in India. Claiming any credit in India for taxes paid in the US would be a challenge here, because no income is getting taxed in India. So, how would you claim the credit?," he said.

In such cases, when a person is resident but not an ordinarily resident, it would normally "amount to a cost", he added.

Shah is of the view that IT professionals going abroad for short-term assignments may opt to receive their salaries in India. That way, there’s no remittance required, he said.

“We have to look at the fine print and think about the right way of approaching this. If the US tax is creditable against taxes to be paid in the US, then it is easier to comply with. It would then be equivalent to India’s TCS under LRS, as far as we are concerned," the analyst noted.