By Moustafa Daly
India, one of the world’s biggest and fastest growing economies, is also one of the largest EB-5 investor markets. Its Central Bank has announced a range of new regulations regarding increased taxations on outward fund transfers from the country, including foreign investments, which would impact EB-5 investments originating from India’s banking system.
In its Union Budget 2023 announced this month, the Central government introduced an income tax on outward transfers, which for EB-5 investments would include a 20% tax-collected-at-source (TCS), anticipated to take effect starting July 1, 2023, upon approval by the parliament. This would be a sharp increase compared to the current 5% TCS rate.
According to Utsav R. Doshi, managing partner at R K Doshi & Co LLP, the proposed rule means that “one will have to make available an amount equivalent to $1,000,000 in order to enable a net-wire of $800,000. Articles written on this subject recently have stated that a sum of $160,000 will be deducted on $800,000. This is wrong,” says Doshi.
“The deduction is always on a “gross-up” basis. Hence, you need to make available INR equivalent of US$1,000,000 in order to effectuate the net wire,” he elaborates.
The tax can eventually be refunded for Indian EB-5 investors
The tax can be claimed back on tax returns, a reportedly prolonged process for such high figures.
It is not, however, a new tax, says Jay Bhatia, managing attorney at JKB Legal Attorneys: “Tax Collection at Source (TCS) is not an additional tax, but can be considered as a form of advance tax that can be set off against your other tax liabilities when you file the year’s tax returns.”
“Having said that, this means that affluent Indians will need to budget for 20% more when they transfer funds for overseas investments starting 1 July 2023, and be prepared to lock in this 20% amount for a few months till they can claim it back from the tax authorities,” says Bhatia.
Doshi continued: “The pertinent question for any EB-5 investor is if the amount of TCS will be refundable. The answer to it is very much yes. All you have to do is file your tax returns and get the TCS adjusted. If your net tax liability is negative, then you can also claim a tax refund.”
EB-5 investors in India need to act fast
The most guaranteed way to avoid the 20% TCS is initiating the transfers before the announced deadline of July 1, 2023, according to Bhatia.
“In case you are looking to remit money overseas this year for global investments, it may be more efficient to complete these transactions at the current 5% TCS rate, before the new regime comes into effect in July,” he explains.
In the short term, the “announcement to increase the TCS on foreign remittances […] will drive up demand for foreign investment options, such as the EB-5 program, in the run up to July 1, 2023,” explains Sandhya Kapoor, director at ActiveAvenues, expecting the announcement to be the beginning of a trend for the Indian government.
“It indicates the government is going down a path to make foreign remittances more cumbersome for the Indian investor and will continue to do so in the future, so it is pragmatic to take advantage of the current regime that is available,” she adds.
After July 1, Kapoor predicts, investors will seamlessly adjust to the new tax as if it’s merely a hike in the rate of the EB-5 investment threshold.
“Remember, the EB-5 program only accepts the most pristine funds, and such investors are familiar with and not necessarily daunted by such changes,” she says.
Bhatia also notes that the tax is only collected from payments transferred through accounts of legal residents of India. “TCS does not impact transactions made from non-resident bank accounts,” he said.
Long forgone right by India?
The Indian government sees the step as an overdue collection of lost revenue.
“Our view point is that it was revenue foregone by the government. We have certain tax treaty with any jurisdiction which permits the Indian government to deduct tax at a certain rate. We had foregone that right. It was helping the other governments, and the other jurisdictions,” recently said Nitin Gupta, chairman of India’s Central Board of Direct Taxes, to Reuters when discussing the proposed taxation overhaul in the new budget.
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