. S.

Jain Subodh Law College, Jaipur

Affiliated to

Dr. Bhimrao Ambedkar Law University

2021-2022
Project on

“TAXATION ISSUES CONCERNING HNIs”

SUBMITTED BY: SUBMITTED TO:

Dr. ADITI SWAMI
PREETI MEENA. ASST.PROF,FACULTY OF ENGLISH
1 SEMESTER BA.LLB
S.S JAIN SUBODH LAW COLLEGE,
JAIPUR
 STUDENT DECLARATION BY THE

I hereby declare that the work reported in this project entitled, “TAXATION ISSUES
CONCERNING HNIs”, submitted to the S. S. Jain Subodh Law College, Jaipur is an
authentic record of my work carried out under the supervision of Asst. Prof. ADITI SWAMI.
It is further certified that there is no plagiarism in this work. I further attest that I am fully
responsible for its content.

(Signature of the Scholar)

Name: PREETI MEENA
Place: Jaipur, Rajasthan
Date: _/0_/2022
SUPERVISOR’S CERTIFICATE
This is to certify that the work reported in the project entitled, “TAXATION ISSUES
CONCERNING HNIs”, submitted by PREETI MEENA, to the S. S. Jain Subodh Law
College, Jaipur is a bonafide record of her original work carried out under my supervision. It
is further certified there is no plagiarism in it. This work is being recommended for further
evaluation by the external examiner.

Place: Jaipur, Rajasthan (Signature of the Supervisor)

Date: _/0_/2022
ACKNOWLEDGEMENT

When I embarked this project, it appeared to, as an onerous task. Slowly as I progressed, I did
realize that I was not alone after all.

I wish to express my gratitude to DR. ALPANA SHARMA, director, S.S. JAIN SUBODH
LAW COLLEGE FACULTY MEMBER, Program coordinator who have extended their kind
help, guidance but also for the freedom he rendered me during this project work.

I’m deeply indebted to my guide Dr. ADITI SWAMI for not only her valuable and enlightened,
guidance but also for the freedom she rendered me during this project work.

I’m thankful to my group member and other classmates, well-wishers who with their
magnanimous and generous help and support made it a relative easier affair. My heart goes out
to my parents who bear with me all the trouble I caused them with smile during the entire study
period and beyond.
TABLE OF CONTENT

Introduction
Concept

CHAPTER-1

1. Meaning
2. Purpose
3. Types

CHAPTER -2

1. Who Are High Net Worth Individuals Or HNIS?

2. Definition of a High-Net-Worth Individual
3. Types of HNWIs
4. Understanding High-Net Worth Invidividuals
5. HNIs Preference for Investment Solutions
6. Important features of tax administration in dealing with High Net Worth Individuals
(HNWIs)
7. Engaging with High Net Worth Individuals on Tax Compliance
8. Considerations for HNIs
9. Criticism of High-Net-Worth Individuals
10. Conclusion
11. Bibliography
 INTRODUCTION

Taxation is the means by which a government or the taxing authority imposes or levies a tax
on its citizens and business entities. From income tax to goods and services tax (GST), taxation
applies to all levels. The first record of organized taxation comes from Egypt around 3000 B.C.,
and is mentioned in numerous historical sources including the Bible. Tax practice continued to
develop as Greek civilization overtook much of Europe, North Africa and the Middle East in
the centuries leading up to the Common Era .James Wilson, the Scotsman who created India’s
first Budget, introduced the income tax act in 1860.

The financial requirements of the Civil War prompted the first American income tax in 1861.
At first, Congress placed a flat 3-percent tax on all incomes over $800 and later modified this
principle to include a graduated tax. Congress repealed the income tax in 1872, but the concept
did not disappear.

The globally accepted definition for an Ultra HNI (High Net Worth Individual) is one who has
a net worth of at least $ 30 Million (roughly Rs. 200 Crores) across financial and physical
assets. … 50 Crores for an Indian Resident. As of June 2020, there were estimated to be just
over 13 million HNWIs in the world. The United States had the highest number of HNWIs
(4,700,000) of any country, while New York City had the most HNWIs (348,000) among cities.
 CONCEPT

In the recent past, several amendments have been introduced on the income tax and regulatory
fronts, which impact high net-worth individuals (HNIs).In this world nothing can be said to be
certain, except death and taxes.’ These 18th century words of wisdom from Benjamin Franklin,
one of the founding fathers of the United States, holds true even in the 21st century.

The individuals who have a taxable income of ₹1 crore or above – High Net worth Individuals
or HNIs – are entitled to two percent additional surcharge. It was proposed by the Finance Act
of 2015. Recently, the Budget 2019 introduced a broad 22 percent rise in surcharge rates for
individuals who have taxable income of more than ₹5 crore. The tax proposal has widened the
tax bracket for HNIs to nearly 43%. These adverse Indian taxation policies on HNIs has made
most of them look out for other ways to transfer their revenue sources and financial assets
particularly to tax haven countries.

High Net-worth Individuals (HNIs) are widely defined as those having an investible surplus of
more than Rs 5 crore. By 2027, there will 9.5 lakh HNI Tax is the means by which governments
raise revenue to pay for public services. Government revenues from taxation are generally used
to pay for things such public hospitals, schools and universities, defence and other important
aspects of daily life.
Chapter-1

TAXATION HNIs

(MEANING,TYPES & PURPOSE)

Taxation is a term for when a taxing authority, usually a government, levies or imposes a
tax. The term “taxation” applies to all types of involuntary levies, from income to capital
gains to estate taxes. Though taxation can be a noun or verb, it is usually referred to as an act;
the resulting revenue is usually called “taxes.”

Simple meaning is Tax is the means by which governments raise revenue to pay for public
services. Government revenues from taxation are generally used to pay for things such public
hospitals, schools and universities, defence and other important aspects of daily life.

There are many different types of taxes:

• A direct tax is collected by government from the person on whom it is

imposed (e.g., income tax, corporate tax).
• An Indirect tax is collected for government by an intermediary (e.g. a
retail store) from the person that ultimately pays the tax (e.g., GST)

HNIs stands for High Networth Individuals. HNI or HNWI is a person or family with liquid
assets above a certain figure. Although there is no precise definition of how rich someone
must be to fit into this category, high net worth is generally quoted in terms of having liquid
assets of a particular number. In India, individuals with investible surplus of Rs. 25 lacs to
Rs. 2 crore are considered as emerging HNI. Whereas, those individuals with more than Rs. 2
crores of investible capital are considered HNI.

High-net-worth individual (HNWI) is a term used by some segments of the financial services
industry to designate persons whose investible wealth (assets such as stocks and bonds)
exceed a given amount. Typically, these individuals are defined as holding financial assets
(excluding their primary residence) with a value greater than US$1 million.[1]
Purpose

The broad purpose associated with taxes is to fund the government. It's that simple. The
government can’t fund without appropriate resources, and it obtains that resources from what
you could call ‘robbing’ or ‘taxing’ its citizens.

Purpose #1: Punish political enemies, especially high income people. Make them pay until it
really hurts.

Purpose #2: Damage the economy so people rise up, and demand a bigger role of government
in our lives. Voilà, politicians gain more power.

Purpose #3: Make corporate donors pay attention to politicians so they ask for favors and
exemptions to onerous taxes. Voilà, irrelevant politicians are now extremely relevant.

Lesson: Follow the Money

At the risk of sounding cynical, I used to believe taxes were needed to run the government. I
now see higher taxes as a tool for greater power.
 Chapter -2

(1)Who Are High Net Worth Individuals Or HNIs?

HNIs or high net-worth individuals (HNIs) belong to the financial services sector where a
class of individuals has an investible surplus of more than Rs 5 crore, below this threshold.
Such investors are categorised as retail as they are measured by their net worth in the
financial industry.

(2)Definition of a High-Net-Worth Individual

The “high-net-worth individual” term is primarily used by the financial services industry to
designate their richest clients for exclusive services. For example, a credit card company can
offer HNWIs an invitation-only card with such perks as 24-hour concierge service, unlimited
spending and luxury hotel upgrades.

Financial advisors also categorize their clients as high-net-worth or not. Advisors who are
registered with the SEC must annually report how many HNWI clients they have. To do that,
they define them as having $750,000 in investable assets or a $1.5 million net worth.

As under the income tax regulations in India, the term HNIs (reference to High Net Worth
Individuals) is not defined and as such the constituents of the HNI category are to be assumed
based on the general categorization by various reports based on either wealth or income of
such HNIs. In recent times, there has been a high level monitoring of transactions done by
HNIs by the tax authorities in India and abroad with a view to ensure that there is no
escapement of income or wealth from taxation. Some of the latest developments from
taxation and disclosure perspective include enactment of the black money law in India, the
signing of the FATCA agreement with the US government and various tax exchange
information agreements.

Recently, India has enacted a new law to curtail offshore tax evasion. It requires disclosure of
foreign income and foreign assets in the income tax return. It would also cover a foreign asset
held by an individual as a beneficial owner or otherwise. The undisclosed foreign income and
fair market value of the undisclosed asset would be taxed at a flat rate of 30 per cent in the
year in which it comes to the notice of the tax officer along with a penalty of 90 per cent of
such tax. It also provides for prosecution (rigorous imprisonment up to 10 years with fine) for
evasion of tax. No deduction, exemption or set off or carry forward of losses would be
allowed on such income. The government has come out with one time compliance window
offering an opportunity to taxpayers who have undisclosed foreign assets up to 30th
September 2015, where in the tax rate and penalty have been cumulatively capped at 60 per
cent.

Another development includes the Inter-Governmental Agreement (IGA) which India has
entered into with US to implement the FATCA and to promote transparency on tax matters.
As the IGA is reciprocal in nature, US will also share the information about the accounts held
by Indians with the financial institutions in the USA. India has also signed the Multilateral
Competent Authority Agreement (MCAA) on 3rd June, 2015 to enable automatic exchange of
information. Till date, 60 countries have agreed to exchange information automatically in
accordance with MCAA.

Further 94 countries have committed to exchange information on an automatic basis from

2017 onwards as per the new global standards on automatic exchange of information known
as Common Reporting Standards (CRS) on Automatic Exchange of Information (AEOI). The
new global standards oblige the treaty partners to exchange extensive financial information
after collecting the same from financial institutions in their country including information
about beneficial owners of entities. This would enable India to receive information from
almost every country in future and getting information about assets of Indians held abroad
including the entities in which Indians are beneficial owners.

Also, India has been taking efforts towards renegotiation of old tax treaties to bring the
Article on Exchange of Information to International Standards and expansion of India’s treaty
network by signing new tax treaties and Tax Information Exchange Agreements (TIEAs)
with many countries to facilitate exchange of information.

These measures are likely to act as a strong deterrent against non-disclosure of income and
wealth outside India and improve tax compliance by the HNIs. Going forward, as the
regulations are becoming more stringent and globally integrated with automatic exchange of
information between countries, it is pertinent that the HNIs ensure compliance with the tax
and disclosure requirements under the Income Tax regulations in India.

Of course, financial advisors also identify their HNWI clients so they can cater services to
their specific needs. Indeed, some wealth management firms work exclusively with HNWIs
or provide them with extra services. These firms can allocate client assets across different
model portfolios, including actively managed ones not available to clients with smaller
investable asset levels. HNWIs may also receive customized financial planning advice around
complex topics like estate planning and charitable giving.

Still, there is no multi-industry-recognized level of wealth you have to reach to be considered

an HNWI. However, the general consensus is $1 million in liquid assets. This means cash
you have at hand or assets you can easily sell for cash with little or no diminishment of its
value. So if you’re trying to see if you’re high-net-worth, you can usually count the following
liquid assets:

• Checking accounts
• Savings accounts
• Money market accounts
• Stocks
• Bonds, especially U.S. Treasuries
• Mutual fund shares

Most financial institutions won’t allow you to factor in assets that are harder to liquidate.
These may include real estate investments, vehicles, land and more.

Generally, HNIs are widely defined as people whose investible assets such as bonds and
stocks exceed a certain amount. A high-net-worth individual is a person who owns liquid
assets including money held in brokerage accounts or banks, and excluding assets like a
primary residence, durable goods or collectibles.

HNIs are always in high demand by private wealth managers because it takes a good amount
of work to preserve and maintain such assets. The more liquid assets held by an individual,
the more appealing an HNI becomes to wealth managers, given they earn money equal to a
percentage of the total assets they man Recently, India has enacted a new law to curtail
offshore tax evasion. It requires disclosure of foreign income and foreign assets in the income
tax return. It would also cover a foreign asset held by an individual as a beneficial owner or
otherwise. The undisclosed foreign income and fair market value of the undisclosed asset
would be taxed at a flat rate of 30 per cent in the year in which it comes to the notice of the
tax officer along with a penalty of 90 per cent of such tax. It also provides for prosecution
(rigorous imprisonment upto 10 years with fine) for evasion of tax. No deduction, exemption
or set off or carry forward of losses would be allowed on such income. The government has
come out with one time compliance window offering an opportunity to taxpayers who have
undisclosed foreign assets upto 30th September 2015, where in the tax rate and penalty have
been cumulatively capped at 60 per cent. Another development includes the Inter-
Governmental Agreement (IGA) which India has entered into with US to implement the
FATCA and to promote transparency on tax matters. As the IGA is reciprocal in nature, US
will also share the information about the accounts held by Indians with the financial
institutions in the USA. India has also signed the Multilateral Competent Authority
Agreement (MCAA) on 3rd June, 2015 to enable automatic exchange of information. Till
date, 60 countries have agreed to exchange information automatically in accordance with
MCAA. Further 94 countries have committed to exchange information on an automatic basis
from 2017 onwards as per the new global standards on automatic exchange of information
known as Common Reporting Standards (CRS) on Automatic Exchange of Information
(AEOI). The new global standards oblige the treaty partners to exchange extensive financial
information after collecting the same from financial institutions in their country including
information about beneficial owners of entities. This would enable India to receive
information from almost every country in future and getting information about assets of
Indians held abroad including the entities in which Indians are beneficial owners. Also, India
has been taking efforts towards renegotiation of old tax treaties to bring the Article on
Exchange of Information to International Standards and expansion of India's treaty network
by signing new tax treaties and Tax Information Exchange Agreements (TIEAs) with many
countries to facilitate exchange of information. These measures are likely to act as a strong
deterrent against non-disclosure of income and wealth outside India and improve tax
compliance by the HNIs. Going forward, as the regulations are becoming more stringent and
globally integrated with automatic exchange of information between countries, it is pertinent
that the HNIs ensure compliance with the tax and disclosure requirements under the Income
Tax regulations in India. Of course, financial advisors also identify their HNWI clients so
they can cater services to their specific needs. Indeed, some wealth management firms work
exclusively with HNWIs or provide them with extra services. These firms can allocate client
assets across different model portfolios, including actively managed ones not available to
clients with smaller investable asset levels. HNWIs may also receive customized financial
planning advice around complex topics like estate planning and charitable giving. Still, there
is no multi-industry-recognized level of wealth you have to reach to be considered an HNWI.
However, the general consensus is $1 million in liquid assets. This means cash you have at
hand or assets you can easily sell for cash with little or no diminishment of its value. So if
you’re trying to see if you’re high-net-worth, you can usually count the following liquid
assets: Checking accounts Savings accounts Money market accounts Stocks Bonds,
especially U.S. Treasuries Mutual fund shares Most financial institutions won’t allow you to
factor in assets that are harder to liquidate. These may include real estate investments,
vehicles, land and more. Generally, HNIs are widely defined as people whose investible
assets such as bonds and stocks exceed a certain amount. A high-net-worth individual is a
person who owns liquid assets including money held in brokerage accounts or banks, and
excluding assets like a primary residence, durable goods or collectibles. HNIs are always in
high demand by private wealth managers because it takes a good amount of work to preserve
and maintain such assets. The more liquid assets held by an individual, the more appealing an
HNI becomes to wealth managers, given they earn money equal to a percentage of the total
assets they manage.

(3)Types of HNWIs High-net-worth individuals (HNWIs):

Investors who own liquid assets valued between Rs 5 lakh and Rs 5 crore Very-high-net-
worth individuals (VHNWIs): Investors who possess liquid assets valued between Rs 5 crore
and Rs 25 crore Ultra-high-net-worth individuals (UHNWIs): Investors who own more than
Rs 25 crore in liquid assets The sub-classifications of high-net-worth individuals will vary
from firm to firm, and the qualifications for each will differ as well. For example, investment
firm Vanguard offers its Flagship services to high-net-worth investors, which it classifies as
investors with between $1 million and $5 million in Vanguard assets. However, once a client
has $5 million or more in investable assets, Vanguard describes them as “ultra-high-net-
worth investors” and offers them its Flagship Select services. Goldman Sachs on the other
hand, sets the “ultra-high-net-worth” threshold at $10 million in liquid assets.

(4)Understanding High-Net Worth Individuals:

The term high-net-worth individual (HWNI) refers to a financial industry classification
denoting an individual with liquid assets above a certain figure. People who fall into this
category generally have at least $1 million in liquid financial assets.

The assets held by these individuals must be easily liquidated and cannot include things like
property or fine art. HNWIs often seek the assistance of financial professionals in order to
manage their money. Their high net worth often qualifies these individuals for additional
benefits and opportunities.

Individuals are measured by their net worth in the financial industry. Although there is no
precise definition of how wealthy someone must be to fit into this category, high net worth is
generally quoted in terms of having liquid assets of a particular number.

The exact amount differs by financial institution and region but usually refers to people with
a net wealth of seven figures or more. As noted above, people who fall into this category
have more than $1 million in liquid assets, including cash and cash equivalents. These assets
do not include things like personal assets and property such as primary residences,
collectibles, and consumer durables.

HNWIs are in high demand by private wealth managers. The more money a person has, the
more work it takes to maintain and preserve those assets. These individuals generally demand
(and can justify) personalized services in investment management, estate planning, tax
planning, and so on.

As such, a high-net-worth individual classification generally qualifies people for separately

managed investment accounts instead of regular mutual funds. This is where the fact
that different financial institutions maintain varying standards for HNWI classification comes
into play. Most banks require that a customer have a certain amount in liquid assets and/or a
certain amount in depository accounts with the bank to qualify for special HNWI treatment.

HNWIs are also given more benefits than those whose net worth falls under $1 million. They
may qualify for:

• Services with reduced fees

• Discounts and special rates
• Access to special events
(5)HNIs Preference for Investment Solutions

It can be observed that HNIs seek a conservative investment plan. People with big wealth
tend to take less risk simply because the downside is quite steep. Another reason is that they
have high monthly and recurring financial obligations which depend on big capital and high
liquidity. As their risk appetite is comparatively lower side, it better for them to deploy a big
portion of their capital in fixed income assets like fixed deposits, treasury bonds, government
and corporate bonds, etc. Equity exposure is important but conservative route is opted by the
HNIs. As a major portion of the capital is parked in fixed income assets, they bring a small
capital in the equity market. But they don’t go for daredevil investment opportunities by
investing in small-cap and midcap segments, they focus only on blue chip stocks which have
a high dividend yield and strong fundamentals. In a way, it would be safe to say, HNIs are
highly risk averse in their investment.

As per ICICI private wealth management service, HNIs generally identify their needs on the
following broad parameters:

Investments: While doing investment the three primary concern for HNIs are Wealth
accumulation, Wealth preservation and Liquidity of wealth in long term. They generally take
the holistic view of their wealth in terms Personal wealth and Business wealth and try to
demarcate it for unexpected events.

Protection: HNIs opt for Protection solutions to safeguard their Wealth, Health, Assets and
Against any Liabilities. These needs are typically overlooked by HNIs.

Credit: Though HNIs have huge surplus, yet they look for low interest home loan, working
capital and terms loan from other financial institute and gaining more return / interest from
their wealth.

Inheritance planning: Smooth transfer of wealth from one generation to next generation is
important concern, keeping in view tax requirement and appropriate legal structures.

Tax planning: This is inherent part of any financial decision for any individual. Everybody
needs to consider the applicable tax deductibility and post- tax return in their investment.

Special Considerations
Almost 63% of the world’s HNWI population lives in the United States, Japan, Germany, and
China, according to the Cap Gemini World Wealth Report. The U.S. had about 6.6 million
HNWIs in 2020, up 11.3% from the year before.

As a group, the HNWI population saw its assets grow 7.6% in 2020, reaching $79.6 trillion in
wealth. North America led the world’s HNWI wealth with $24.3 trillion, followed by Asia with
$24 trillion. HNWI wealth in Europe was at $17.5 trillion, followed by Latin America with
$8.8 trillion, the Middle East with $3.2 trillion, and Africa with $1.7 trillion.

Cap Gemini separates the HNWI population into three wealth bands:

Millionaires next door, who have $1 million to $5 million in investable wealth

Mid-tier millionaires with $5 million to $30 million

Ultra-HNWIs, which includes those with more than $30 million

Globally, the ultra-HNWI population numbered 200,900 in 2020. Mid-tier millionaires

numbered 1.89 million, while the millionaires next door category made up the largest group at
18.7 million.

Top 10 Countries for High Net Worth Individuals, 2020

Country. HNWI population. YoY growth

United States 6,575,000 11.3%

Japan 3,537,000 6.2%

Germany 1,535,000 6.9%

China 1,461,000 11%

France 714,000 1.7%

U.K. 573,00 -3.0%

Switzerland 459,000 4.9%

Canada 403,000 2.9%

 Italy 301,000 2.1%

Netherlands 299,000 4.1%

Source: Cap Gemini World Wealth Report.

(6) Important features of tax administration in dealing with High Net Worth Individuals
(HNWIs)

HNWIs represent a unique tax segment. Their affairs are generally characterised by enhanced
mobility and a high degree of complexity that commonly transcends national borders.
Sometimes, their fiscal affairs will be the result of a disorganised accumulation of assets over
a period of time. Increasingly, however, HNWIs seek the advice of experts with a view to
rationalising their affairs in line with overarching planning objectives, (e.g. in terms of control,
confidentiality or succession). Where their affairs transcend national borders, conflicts may
arise as a result of different legal and fiscal systems. In order to effectively deal with HNWIs,
national tax authorities need to understand the tax issues that concerns them. This also means
that tax administrations need to be conversant with the different taxes that make up a national
tax system, as established families will focus on both direct taxes and capital taxes. In the UK,
the problem caused by the division of responsibilities for the administration income tax and
capital gains taxes became evident in the context of the recent changes to the taxation of
individuals who are resident but non-domiciled (in the English law sense of the term) in the
UK, as the draftsmen initially struggled to draft around certain income tax issues relating to the
taxation of benefits paid out of offshore trusts, notwithstanding that similar provisions already
existed in the capital gains tax legislation.

To the extent permitted by the local laws and practices, tax authorities should seek to solve
issues by way of dialogue rather than confrontation. In this context, dialogue need not be client
specific, and tax authorities may find it useful to interact with tax intermediaries and wealth
planners on a regular basis (e.g. consultations, training, induction on specific issues) with a
view to understanding common concerns and current trends. Recruitment from the private
sector (and vice-versa) is also beneficial, as this helps the relevant tax authorities to gain
precious insight into practitioners’ concerns.
A dedicated unit may function as a collector of know-how and best practices in relation to
issues that are common to many HNWIs. However, it is important that technical excellence be
matched by an equal degree of approachability and proximity to the taxpayer and his advisors.
In practice, therefore, there is a natural tension between centralisation of knowledge and
closeness to the ‘trenches’; one solution might be to create special support units to work
alongside tax administrators. Either way, easy access should be a central feature, so that
practitioners and tax administrators alike may refer specific issues to an expert group.

Whilst the idea of ‘enhanced relationship’ has some merits, many taxpayers’ concerns about
confidentiality remain unresolved and need to be addressed urgently. To give some examples,
in November 2007 the UK tax authorities reportedly lost computer disks containing
confidential details of 25 million child benefit recipients. The disks contained such confidential
information as addresses and bank accounts. This was not the first time the UK tax authorities
had to apologise for the loss of sensitive. More recently, a memory stick containing confidential
passcodes to the online Government Gateway system, which covers everything from tax returns
to parking tickets was found in a pub car park. On a smaller scale, it was reported that a local
authority allegedly abused anti-terrorism powers to check whether a child lived in a school
catchment area and to spy on fishermen. The potential abuse of anti-terrorism legislation is also
at the heart of the international crises that embroils the UK and Iceland over the recent collapse
of Icelandic banks and the subsequent seizure of Icelandic assets.

The UK is not the only country to have experienced problems with data protection. On 30 April
2008, the Italian revenue authorities posted the tax returns of all Italian taxpayers for 2005 on
their official website, spurring violent polemics. Notwithstanding a dramatic uturn from the tax
authorities, it has been reported that the tax returns remain available on file-sharing sites10.
Always in Italy, the government has recently intervened against the growing publication of
intercepted telephone conversations, whilst in France it was revealed that the head of domestic
intelligence services kept confidential information on politicians, but also on certain HMWIs
(including a singer and a kick-boxing champion). According to an article in The Economist
magazine, CDs of the Italian database were made available, same day on E-bay for $75,
showing how effectively private parties exploit government lapses; Media reports in the Italian
press at the time noted that the result of the data publication by the Italian authorities was that
the mafia’s efforts at kidnapping and extortion would be aided by use of the government
database which would spare them the effort of research on potential victims.
(7)Engaging with High Net Worth Individuals on Tax Compliance

High Net Worth Individuals (HNWIs) pose significant challenges to tax administrations due to
the complexity of their affairs, their revenue contribution, the opportunity for aggressive tax
planning, and the impact of their compliance behaviour on the integrity of the tax system. This
publication examines in detail this taxpayer segment, describes their usage of aggressive tax
planning schemes and proposes prevention, detection and response strategies that tax
administrations can use to respond to these challenges. It also addresses aspects of voluntary
disclosure initiatives for past non-compliance that may be particularly pertinent in the current
environment.

The publication outlines a number of innovative approaches to enable governments to better

manage the risks involved with marketed tax schemes and tailor-made arrangements. To
improve compliance, tax administrations could consider changing the structure of their
operations to focus resources effectively, for example, through the creation of a dedicated
HNWI unit. Other recommendations include creating the appropriate legal framework,
exploring forms of co-operative compliance and engaging more in international co-operation,
at both the strategic and operational level.

At the other side of the spectrum there are the reported scandals involving the abuse of banking
secrecy laws by financial institutions in Switzerland and Liechtenstein. Though tax evasion is
unacceptable, the confidentiality is a real concern that needs to be dealt with on a national and
international level. With regard to taxation, this issue is exacerbated by the exchange of
information under tax treaties, which means that an individual with international connections
has no control over the level of security of his data.

Throughout the 21st century, the tax treatment of the super-wealthy has served as a political
football. Few issues in recent memory have more starkly divided politicians and the general
public along ideological lines. On one side, supply-side adherents channel Ronald Reagan,
proclaiming that keeping taxes low for the affluent frees up money for them to invest in ways
that create jobs and grow the economy for everyone else.

This line of thinking, known as trickle-down economics, advocates cutting taxes for the rich
not just for the benefit of the rich, but also because their prosperity then cascades down to the
rest of society.
Then there is the other side, which feels the middle class and working poor shoulder too much
of the tax burden, and that UHNWIs exploit loopholes and creative accounting practices to pay
far less than their fair share. Proponents of higher taxes on the wealthy point specifically to
long-term capital gains, the method by which many wealthy people amass their fortunes. Taxes
on long-term capital gains depend on an individual’s income level, with the highest earners
paying 20%.

The Trump administration’s Tax Cuts and Jobs Act—signed into law on Dec. 22, 2017—made
the largest overhaul to the tax code in about 30 years. It retained the structure of seven tax
brackets, keeping two at the same rate and changing five, including the top bracket. The new
code dropped that rate from 39.6% to 37%. These changes are temporary and are expected to
expire in 2025.

The tax rate for ultra-high-net-worth individuals used to be much higher. As recently as 1980,
it was 70%. In 1963, the top tax bracket was a staggering 91%. Politicians abound who would
love to see a return to these high rates on the extremely wealthy. With polarization in politics
at an all-time high, UHNWIs live with the constant anxiety of a power shift toward those less
friendly to their interests.

Estate Planning;

Ultra-high-net-worth individuals worry about retaining their riches so they can continue to fund
their own lifestyles. But most of them also want to bequeath their fortunes to their heirs when
they are no longer around. Ideally, they want the government to appropriate as little of this
money as possible before it passes to the next generation. The estate tax only applies to the
extremely wealthy, with more than 90% of the tax being paid by the top 10% of earners.
Roughly 40% of estate taxes are paid by 0.1% of the richest people in the country. The Tax
Cuts and Jobs Act increased the estate tax exemption for the 2019 tax year, so $11.4 million of
an estate is exempt from taxes. This number was $11.58 million in 2020 and is $11.7 million
for 2021. Anything above and beyond that amount is taxed at a rate of 40%. Although the
exemption has been increased over the years, the maximum estate tax rate has effectively
dropped. In 1997, anything above the $600,000 exemption was taxed as much as 55%. This
means that the more the estate is worth—at least it's above the exemption—the more a UHNWI
stands to lose in the passing of their estate. Moreover, many states have their own estate taxes,
which are imposed on top of the federal estate tax. Some also impose inheritance taxes on
beneficiaries. UHNWIs use many schemes to mitigate the effects of the estate tax. These tactics
include leaving their estates to surviving spouses, in which case they are exempt from taxation,
making use of charitable contributions, and setting up a variety of trust accounts—all of which
can be used to get around the estate tax.

Sustaining Lifestyle During Retirement

For UHNWIs who became rich from investing, basically, there's no distinction between
working years and retirement years. These individuals are likely to continue doing what has
worked for them, with age being an irrelevant factor. However, those who became UHNWIs
by working, including CEOs and other highly paid professionals, sometimes face a loss of
income when they decide to call it quits. While having $30 million or more should be enough
to live any kind of retirement lifestyle you want, some UHNWIs do a poor job of managing
their money and may have to scale back at some point. One problem that comes up at times
with UHNWIs is illiquidity; they have millions of dollars, but most or all of it is tied up in land,
real estate, and other assets they can't easily convert to cash. Other UHNWIs take too many
risks with their money, and while they do not feel the effects so much when they still have piles
of money coming in, they feel it when they retire, and a big loss is not so easily replenished.

Protecting Their Wealth

During the Great Recession of 2007 to 2009, many UHNWIs became merely high-net-worth
individuals (HNWIs), meaning individuals with more than $1 million in net worth but less than
$30 million. For a truly unlucky few, their wealth hemorrhaging went beyond losing the ultra
label—meaning they lost everything.

Most UHNWIs do not have their money sitting around in certificates of deposit (CDs), money
market accounts, cash value life insurance, and other so-called safe investments that provide
tepid returns at best. One of the reasons they are so wealthy is they make use of aggressive
investment vehicles that consistently beat the market.

In market matters, however, reward and risk often move in lockstep. When a bear market or
recession hits, the high-growth investments that helped UHNWIs get rich are frequently the
first to take a precipitous dive. For this reason, UHNWIs who rely on the markets for income
often live with the constant stress of another looming crash.

(8) Considerations for HNIs

Change in residency provisions

Some HNIs earn income outside India by carrying out business or professional activities in
India; however, depending on their period of stay, they may remain non-resident in India as
well as abroad. The Finance Act, 2020, amended certain residency conditions with effect from
financial year 2020-21 (FY21). The amended laws say that an Indian citizen having a total
income—other than from foreign sources—exceeding ₹15 lakh during a particular FY shall be
deemed to be a resident of India, albeit a not ordinarily resident (NOR) for that FY, if he/she
is not liable to tax in any other country by reason of his/her domicile or residence or any other
criteria of similar nature. Further, the extended threshold of 182 days available to Indian
citizens and persons of Indian origin (PIO) for triggering residency during visits to India has
been truncated for persons having a total income, other than income from foreign sources,
exceeding ₹15 lakh during an FY, qualifying them as NOR if their stay is between 120 to 182
days. However, what constitutes as visits is not well defined.

Taxability of dividend in the hands of shareholder

The Finance Act, 2020, abolished the dividend distribution tax payable in respect of dividends
declared, distributed or paid by a domestic company after 31 March 2020, and accordingly,
such dividend was made fully taxable in the hands of the shareholders (including individuals).
The Finance Act had also imposed a withholding tax at the rate of 10% on all dividends paid
by an Indian company to a resident shareholder whereas the rate to non-resident shareholders
is 20% (plus applicable surcharge and cess). While the taxpayers are now required to pay taxes
on dividend income at the applicable tax rates, some relief has been granted by restricting the
surcharge rates to a maximum of 15%, which could have otherwise gone up to 37% in case of
HNIs.

Capital gains tax on listed shares

Long-term capital gain (LTCG) on equity shares listed on a stock exchange, which were earlier
tax-free, are now under the tax lens. Effective 1 April 2018, LTCG of more than ₹1 lakh on the
sale of equity shares will attract a tax of 10% and the benefit of indexation will not be available,
as per prescribed rules. The surcharge has favourably been restricted to up to 15%, which is
some relief.

Taxability of unit-linked insurance policy (ULIP) proceeds

Finance Act, 2021, amendment provided that for a ULIP taken on or after 1 February 2021, the
maturity proceeds of the policy, with annual premium of over ₹2.5 lakh ,will not be eligible for
exemption under Section 10(10D) of the Act and would be taxable at par with other equity-
oriented mutual funds. Accordingly, the capital gains provisions would also apply on sale or
redemption of such ULIP.

(9) Criticism of High-Net-Worth Individuals

A major problem of categorizing investors into different groups based on their liquid assets is
that those with less than $1 million in liquid assets will not have the same resources that high-
net-worth individuals do. In the case of financial services, they will not receive the same
advice.

This is problematic because individuals with less than $1 million in liquid assets may in fact
need financial advice even more so than high-net-worth individuals. They may not get the same
amount of attention from wealth managers and advisors that high-net-worth individuals
receive.

(10) Covid ravages India, HNIs navigate tax structures to take business and family
abroad.

(HNI) and promoters have started the process of moving out their businesses and families to
the United Arab Emirates (UAE), Singapore and the United Kingdom even as the second Covid
wave shows signs of subsiding in India.

In the last few months, many businessmen have created intermediary companies based in these
countries so that the operations could be handled from these locations. Insiders say that the
second Covid19 wave exposed many businessmen and their families to the deadly virus and
many of them are looking to move to countries that offer better health infrastructure and
security of high-value lives.

In the past one month, several business families have gradually started “creating fact patterns”
so that they don’t get stuck with tax and other regulatory issues.Tax experts say that a fact
pattern has to be created. Also, an intermediary company based outside India cannot abruptly
become a holding company.While Covid-19 and the subsequent devastation are the main
triggers, other factors such as accessing global investment opportunities and avoiding future
tax problems while exiting businesses are also in play, say industry trackers.While Covid-19 is
definitely a trigger as many business families fear what would happen going ahead, other
reasons for many companies and businesses moving outside India include creating global
wealth and ease in selling assets going ahead. Companies are planning carefully and have
created intermediary companies in Dubai, Singapore and the UK in a way that it doesn’t flout
any current tax regulations or other regulations such as POEM,” said Girish Vanvari, founder
of tax advisory firm Transaction Square.

Tax, regulatory considerations for HNIs in India;

In the recent past, several amendments have been introduced on the income tax and regulatory
fronts, which impact high net-worth individuals (HNIs). Here are some key implications of the
changes:

Change in residency provisions: Some HNIs earn income outside India by carrying out business
or professional activities in India; however, depending on their period of stay, they may remain
non-resident in India as well as abroad. The Finance Act, 2020, amended certain residency
conditions with effect from financial year 2020-21 (FY21). The amended laws say that an
Indian citizen having a total income—other than from foreign sources—exceeding ₹15 lakh
during a particular FY shall be deemed to be a resident of India, albeit a not ordinarily resident
(NOR) for that FY, if he/she is not liable to tax in any other country by reason of his/her
domicile or residence or any other criteria of similar nature. Further, the extended threshold of
182 days available to Indian citizens and persons of Indian origin (PIO) for triggering residency
during visits to India has been truncated for persons having a total income, other than income
from foreign sources, exceeding ₹15 lakh during an FY, qualifying them as NOR if their stay
is between 120 to 182 days. However, what constitutes as visits is not well defined.

Taxability of dividend in the hands of shareholder:

The Finance Act, 2020, abolished the dividend distribution tax payable in respect of dividends
declared, distributed or paid by a domestic company after 31 March 2020, and accordingly,
such dividend was made fully taxable in the hands of the shareholders (including individuals).
The Finance Act had also imposed a withholding tax at the rate of 10% on all dividends paid
by an Indian company to a resident shareholder whereas the rate to non-resident shareholders
is 20% (plus applicable surcharge and cess). While the taxpayers are now required to pay taxes
on dividend income at the applicable tax rates, some relief has been granted by restricting the
surcharge rates to a maximum of 15%, which could have otherwise gone up to 37% in case of
HNIs. Capital gains tax on listed shares: Long-term capital gain (LTCG) on equity shares listed
on a stock exchange, which were earlier tax-free, are now under the tax lens. Effective 1 April
2018, LTCG of more than ₹1 lakh on the sale of equity shares will attract a tax of 10% and the
benefit of indexation will not be available, as per prescribed rules. The surcharge has
favourably been restricted to up to 15%, which is some relief. Taxability of excess employer’s
contribution to retiral schemes: Prior to Finance Act, 2020. The contributions made by the
employer to the account of an employee under the provident fund (PF), National Pension
System (NPS) and approved superannuation fund were exempt from taxation in the hands of
the employee up to a specified salary threshold. The Finance Act, 2020, capped the exemption
to employer contributions to aforesaid funds within ₹7.5 lakh per annum. Any employer
contribution above this threshold to such retiral schemes (including any accretion thereto) has
been brought into the ambit of taxation.

Taxability of unit-linked insurance policy (ULIP) proceeds:

Finance Act, 2021, amendment provided that for a ULIP taken on or after 1 February 2021,
the maturity proceeds of the policy, with annual premium of over ₹2.5 lakh ,will not be eligible
for exemption under Section 10(10D) of the Act and would be taxable at par with other equity-
oriented mutual funds. Accordingly, the capital gains provisions would also apply on sale or
redemption of such ULIP.

Applicability of tax collected at source (TCS): Several resident HNIs use the liberalized
remittance scheme (LRS) route for outward investments in securities and properties. With
effect from 1 October 2020, an authorized dealer is required to collect TCS at the rate of 5%
on any amount or aggregate of amounts being remitted outside India (other than for the purpose
of purchase of overseas tour programme package) under the LRS route if exceeding ₹7 lakh in
any FY. However, where the amount being remitted out is towards prescribed education loan,
0.5% TCS rate shall apply instead of 5%. Further, the seller of overseas tour programme
package is required to collect TCS at the rate of 5% irrespective of any monetary. Tax credit
for the TCS shall be available at the time of filing the income tax return, hence it may result in
a cash-flow constraint at the time of remittance.

Tax issues for UK businesses in 2021;

With public sector debt at a record high and tax revenues down, the big question for 2021 is
whether we will see any UK tax increases, one-off taxes or radical changes to the system. Much
turns on the extent to which the coronavirus vaccine roll out and new Trade and Cooperation
Agreement (TCA) delivers an economic boost – and whether that comes quickly enough for
the Budget on 3 March to be used for tax-raising.

‘Sovereign’ tax policy;

The UK is now free of the shackles of the ‘fundamental freedoms’ and VAT directive so can
set its tax policy as it sees fit, subject to observing its commitments to the Organisation for
Economic Cooperation and Development (OECD) and wider community and its obligations
under the TCA. The UK has committed in the TCA not to ‘weaken or reduce’ the level of
protection in current legislation of OECD procedures and standards and entered into a Joint
Political Declaration on Countering Harmful Tax Regimes – no doubt reflecting the EU’s
concerns that the UK could become ‘Singapore-on-Thames.’

HNIs stuck in India may face tax, regulatory troubles;

Several Indian employees on global assignments, expats and high net-worth individuals (HNIs)
who are stuck in the country amid the pandemic are likely to face tax and other regulatory
problems this year, tax experts have said.Indian tax authorities have not issued fresh guidelines
for FY21-22 on people who have had to stay in the country for extended period due to Covid-
19 disruptions. As per the current regulations anyone staying for more than 182 days in India
will have to pay domestic taxes. Many executives on global assignments had moved back to
India during the second wave of the pandemic but are now unable to return. They may see
some complications around their income tax payments if tax authorities decide to scrutinise
them.

But inability to fly to the US or Australia due to flight restrictions may not be enough convince
tax authorities in the absence of fresh guidelines, tax experts said. In every situation, executives
and HNIs will have to convince the regulators that they were not able to travel back to the
country where they work. Senior executives of some private equity and other fund houses based
in Singapore too are stuck in India and the fear is that since the decisions are being taken from
India, the revenue authorities may want to charge higher taxes. Meanwhile, the Union Budget’s
emphasis on wealth creation is unlikely to be fulfilled, given the havoc wreaked by COVID-
19 on economic stability of India and around the globe. Most of the Budget’s proposals
focussed on increased scrutiny of High Net-worth Individuals (“HNIs”) and Non-resident
Indians (“NRIs”). For instance, the proposals on residency rules in India and the taxation being
levied based on the same, widened the scope of Indian tax net and did not come as a relief in
any form to the HNIs or NRIs.

Conclusion

First, consumption tax greatly affects the economy. Its effect differs depending on the product
upon which the tax is imposed and the way consumers use money. The government plays a big
role in restricting these behaviors. Governments limit the types of financial instruments the
private sector can issue, impose change control, restricts ownership of foreign assets, and price
control. Generally, taxing consumption is a very complicated issue. Finding its optimality is
difficult due to its varied effects on different situations. Several critics of the tax reform
programme in India have tended to judge the success or failure of the programme in terms of
increases in revenue that the reform has brought about. Adequacy of increase is measured in
terms of revenue to GDP ratio. To be sure, one of the objectives of tax reform is to improve
revenue elasticity and the tax ratio. However, it should be remembered that the impact of the
reform on revenue increase will not be immediate; tax compliance will increase with reduction
in rates only gradually. Similarly, improvements in tax enforcement will take time. It has been
emphasised in the Report of the Tax Reforms Committee that mere reduction in rates would
not lead to an increase in compliance and that stricter enforcement, which becomes easier with
rate reduction, is a necessary complementary step. Secondly, the growth in revenue is not to be
measured only by the tax ratio. A major objective of the tax reform is to facilitate and promote
faster growth of the economy. What is needed is not an immediate increase in the tax ratio but
a faster growth in revenue arising from a higher growth rate of the economy. With an elasticity
greater than one, in course of time, the tax ratio will rise. It could be said with some confidence
that the tax system has been reformed in India significantly enough to facilitate a higher rate
of growth.
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