In the era of globalization, Indian investors are increasingly looking toward international markets to diversify their investment portfolios. The total overseas direct investment (ODI) from Indian firms increased by 19.46% in FY2023, reaching Rs 9.11 lakh crore, as against Rs 7.62 lakh crore in the previous year.
Singapore as a Leading Destination: In FY2023, Singapore emerged as the top beneficiary of Indian ODI, receiving Rs 2.03 lakh crore. This accounts for 22.3% of the total ODI, indicating the significant interest of Indian firms in the Singaporean market.
These statistics reflect a growing trend among Indian investors and firms to diversify their investments globally, focusing on tax-efficient jurisdictions and significant global markets.
However, navigating the complexities of taxation in multiple jurisdictions can be daunting. This article aims to guide Indian investors on key tax aspects to be considered while planning international investments.
Take 1: Understanding Tax Regulations
Indian Tax Laws: Indian residents are taxed on their global income per the Income Tax Act, which, amongst others, includes the declaration of foreign assets and income in their annual income tax return. The Foreign Exchange Management Act (FEMA) also governs the outflow of funds for overseas investments. Investors must understand these regulations to avoid legal pitfalls.
Foreign Tax Laws: Countries where Indian residents invest may also tax the income generated by such assets. Some of these investments may be subject to tax withholding at source before being remitted to India, and local law may even require mandatory disclosures and filings.
Double Taxation Avoidance Agreements (DTAAs): India has DTAAs with several countries, which may prevent the same income from being taxed twice. These agreements can be leveraged to mitigate double taxation of the same income arising from international investments.
The agreements work by either limiting the foreign country’s right to tax or providing credit in India for the tax paid in the foreign country on offering such income to tax in India. India, however, does not allow credit for an amount more than the tax paid on such assets in a foreign country.
Take 2: Choosing the Right Investment Vehicles
Investment Options: Investors can choose from various international investment vehicles such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Given that the tax implications of such investment vehicles may vary, such implications should align with the investor’s overall tax strategy.
Tax-Efficient Options: Certain countries offer tax-efficient investment options such as retirement accounts (e.g., 401k or IRA in the US) and tax-exempt bonds, which can be attractive for Indian investors seeking lower tax liabilities at least in one of the countries.
Take 3: Role of Residency and Citizenship
Residency Status: Tax liability in India depends largely on the individual’s residency status – Resident or Non-Resident Indian (NRI). NRIs are not taxed on their foreign income in India, which is a significant advantage.
Dual Citizenship: Citizenship in another country complicates tax liability, especially in countries that tax global income. Understanding the interplay of Indian tax laws with those of the other countries of citizenship is, therefore, vital.
Take 4: Tax Planning Strategies
Minimizing Tax Liability: Effective strategies include timing investments and adhering to mandatory holding periods to take advantage of concessional tax rates in certain jurisdictions, investing in countries with favourable tax treaties, and utilizing tax credits available in India for taxes paid abroad to avoid double taxation of such income.
Diversification: Diversifying investments across different countries can balance the tax impact and reduce investment risk.
Take 5: Reporting and Compliance
Disclosure Requirements: Indian laws require the disclosure of foreign assets and income in annual income tax returns by Indian residents.
Consequences of Non-Compliance: Non-compliance with the country’s disclosure requirements can result in legal problems, including fines, penalties, and prosecution.
Take 6: Seeking Professional Advice
Importance of Expertise: Given the complexities of international tax laws, investors should seek guidance from tax professionals and financial advisors.
Benefits of Professional Guidance: Professional advice can help navigate the maze of DTAAs, optimize investment strategies, and ensure compliance with Indian and foreign tax laws.
International investments can offer Indian investors access to diversification and growth. However, understanding the intricate web of tax regulations is crucial to maximizing and protecting returns. Staying informed and seeking professional advice is critical to successful international investment planning.
(Authors are Sidharrth Shankar, Partner and Co-Chair – Corporate Practice, JSA Advocates & Solicitors and Kumarmanglam Vijay, Partner and Head – Direct Tax Practice, JSA Advocates & Solicitors)