View | Tax reforms India needs to retain its migrating HNIs

There have been several reports highlighting the migration of high net-worth individuals (HNIs) from India in the recent past. It is estimated that about 30,000 to 35,000 rich Indians have left the country in the past five years or so. Around 8,000 HNIs are expected to leave India in 2022, and this trend is expected to continue.

Data reveals that HNIs prefer migrating to developed countries like the US, UK, Canada, Australia, New Zealand, Singapore, and Europe.

The reasons for the migration are multifarious, both tax and non-tax. These include better living standards and easier day-to-day life, which in turn is a culmination of many things like simpler tax laws and lower tax rates, better infrastructure, access to world-class facilities, higher education needs of children, ease of doing business, retirement planning and many more.

As India follows residence-based taxation, it tends to lose tax revenue on account of such migration, besides the loss on account of professional and entrepreneurial skills and talent. This also has a long-term impact on consumption, wealth creation and employment generation by such HNIs, had they stayed in the country.

Given this backdrop, the following factors merit attention:

Currently, the highest tax slab rate for individuals is 30 percent. For high-earning individuals having income above INR 5 crores, the effective tax rate is 42.74 percent i.e. 30 percent plus a surcharge of 37 percent and cess of 4 percent. This high rate of tax acts as an instigation for the high earners to think beyond the shores of the country from a tax optimisation perspective. Today, with remote/virtual working being a reality and an accepted norm in the corporate/ business world, it is not difficult to live in a particular country and work globally.

Recently, India has amended its tax laws to bring its stateless citizens into the tax net. Earlier, the residency rules in India provided that an Indian citizen or a person of Indian origin would be considered a tax resident if he was in India for a minimum period of 182 days in a particular financial year. It was, however, felt by the revenue authorities that this threshold enabled Indian citizens to plan their affairs so that they did not become tax residents of any country. This resulted in a case of double non-taxation.

To plug this loophole, the criteria for being a tax resident in India was rationalised and deeming fictions were introduced to levy tax on their India-sourced income if it exceeded INR 15 lakhs. This also led to some rethinking of their citizenship and residential status by several HNIs.

Therefore, reducing the tax and surcharge rates and relaxing the tax residency rules with adequate safeguards could incentivise HNIs to continue to be in India.

● Social security, the missing link

The social security aspect also needs consideration. Unlike some other countries, there are no formal mechanisms in India to sponsor the post-retirement years of the elderly, especially for non-government employees. Building a state-sponsored social security net is ideal, however, it requires huge funds and is a long-drawn process. Therefore, there should be good taxes and other incentives for people to build their social security nets to live a dignified life in their autumn years. Of late, the taxes introduced on retirement funds like PF etc., above certain thresholds have complicated the whole process and made it more cumbersome.

● Impetus to the start-up ecosystem

India now has the 3rd largest startup ecosystem in the world after the US and China. As per the Economic Survey 2021-22, India is home to more than 100 unicorns, and as on 10 January 2022, there were more than 61,400 recognised start-ups in India. While the government has been encouraging the start-up culture in India, however, many Indian start-ups are moving out in search of better access to capital, ease of doing business and several other reasons.

The tax benefit given to “eligible start-ups” is subject to fulfilment of certain conditions. This benefit is available for “eligible start-ups” incorporated between 1 April 2016 to 31 March 2023, which are entitled to get a 100 percent deduction on profits and gains derived from 'eligible business' for any three consecutive years out of 10 years. This benefit is provided only to those start-ups which are recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). The government should consider relaxing this requirement and extending the tax benefit to all start-ups.

Another area of concern for the start-ups and their founders is that the amount received more than the fair market value of the shares issued to investors is exempt only in the case of DPIIT-approved startups if certain conditions are satisfied. The government should consider relaxing this requirement and extending this benefit to all start-ups. Also, the option to defer tax deduction on perquisites arising out of the exercise of Employee Stock Options (ESOPs) by employees should be extended to all start-ups to incentivise start-ups to hire, employ and retain talent.

Apart from the above, start-ups are also subjected to numerous regulations like any large corporation. These include multiple rules and regulations like income tax, GST, FEMA, SEBI, labour laws, company law, etc. and are required to undertake many compliances under these regulations periodically. An honest conversation with any start-up promoter will reveal how much time and effort one has to invest in meeting various compliances on a month-on-month basis, thereby diverting attention from growing the business. The government should consider streamlining the compliances for startups to make them less cumbersome and time-consuming for start-ups.

HNIs are also migrating to other countries on account of their children pursuing higher studies abroad. As per some reports, 4,44,553 students left India for academic pursuits in 2021 as against 259,655 in 2020. According to a RedSeer report, about 1.8 million Indians are expected to annually spend $75-85 billion on education overseas by 2024. Exciting research opportunities, exposure to multiculturalism, attractive salary packages, high quality of education, the option to pursue niche courses and international exposure are the driving factors for students who choose to study abroad.

It is felt that the current Indian education system and curriculum, which was designed to meet the requirements of the industrial revolution, requires a complete overhaul. Increasing the number of seats in Indian colleges and universities to commensurate with the size of our young population is also extremely important. For example, as of 2021, the total seats in the Indian Institute of Management (IIMs) were little more than 5500, but around 1.92 lakh candidates appeared for CAT (the entrance test). The situation is even more alarming when discussing engineering and medical examinations.

Therefore, it is the need of the hour to open up the education sector completely and let private players, including foreign universities, set up centres of higher learning in India.

While the entire world has realised the importance of the healthcare system on account of the difficulties faced due to the COVID-19 pandemic, better healthcare facilities are another reason for the HNI migration.

India ranks 66th among 195 countries as per the Global Health Security Index. It allocates 4 percent of total government spending to healthcare (against the global average of 11 percent) and is ranked 155th on the health spending index. Further, India also has the lowest number of hospital beds, i.e. 0.5 beds per 1,000 people.

To improve its health infrastructure, the government should focus on capacity building by increasing spending on healthcare. It should increase seats in medical colleges and focus on using technology to improvise the existing healthcare system.

Developing world-class infrastructure, business supportive regulatory regime, pollution control, and ease in day-to-day living are also critical.

It is important to note that HNI migration is not a new trend. If we were to look at the other side of the same coin, we as a nation have immensely benefited in the past from remittances made by Indians settled abroad. India’s total inward remittances stood at about $85.6 billion in 2022. Many global companies having CEOs of Indian origin and Silicon Valley companies having Indians in their top management have benefited the country in more than one way. Indian diaspora abroad has strengthened India’s soft power and global positioning.

Frankly, there are no right or wrong reasons why people migrate. A lot is also to do with personal preferences and likings. Having said that, as India marches towards becoming a $ 10 trillion economy over the next decade, it will be good to take measures to address the above issues to slow down the migration of HNIs.