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Fair and equal treatment of tax payers is a fundamental principle of tax administration. Nevertheless, the limited sources available with the Governmental authorities often have to be focused on a particular area or a particular category of tax payers.
The Government is under intense pressure on the issue of unaccounted money allegedly stashed away by some Indians in overseas tax heavens.
In order to tackle these issues, the Government has constituted a high-level committee headed by the Central Board of Direct Taxes (CBDT) Chairman to examine ways of strengthening laws to curb generation of illegal wealth, prevent transfer of such funds abroad and draft a framework for recovery of unaccounted and undisclosed assets.
HNIs refer to individuals at the top of the wealth or income scale; including highly paid employees and professionals.
HNIs typically show higher international mobility than other tax payer segments which leads to complexities on tax residency, taxability of income and application of tax treaties.
As per the Organisation for Economic Cooperation and Development (OECD) report on ‘Engaging with high networth individuals on tax compliance' , HNIs pose significant challenges to tax administration because of complexity of their affairs, their revenue contribution, opportunity for aggressive tax planning and the impact of their compliance behaviour on the integrity of the tax system.
The report found that by focusing resources on the HNI segment, significant improvements in compliance can be achieved.
As per the World Wealth Report 2010, the Asia-Pacific HNI population rose 25.8 per cent overall to 3 million, catching up with Europe for the first time in 2009.
In India, the HNI population has increased to 0.1267 million in 2009, recording a growth of 50.9 per cent as compared to 2008.
According to recent media reports, the CBDT has proposed an intense year-round scrutiny of HNIs. . A panel constituted by the CBDT has recommended setting up a dedicated cell to monitor those earning over Rs 1 crore/annum or spending more than Rs 10 crore a year, or having assets in excess of Rs 100 crore.
Year-round scrutiny
Also, the panel has suggested that the Income-Tax Department should share information on these individuals with its overseas units to keep a close tab on their spending abroad. The panel believes that creation of such dedicated cells to monitor HNIs would help the Department trace any unaccounted money.
The panel has also recommended robust wealth disclosure norms for HNIs including disclosure of productive as well as non-productive assets in India or abroad in the wealth tax returns.
Further, the panel has suggested that the income-tax returns of HNIs should be scrutinised every year to ensure that there is no suppression of income or wealth.
In March 2011, the Government signed agreements with National Council of Applied Economic Research, National Institute of Financial Management, National Institute of Public Finance and Policy, to conduct a study on unaccounted income generated inside and outside the country. They have been given 18 months time to complete the study and also suggest administrative and legal measures to prevent generation of black money.
More needed
In addition to the above measures, the Government will need to dedicate additional resources to gather information and also to have a systematic approach to analysing the collated information in order to achieve the objective of creating a database and monitoring the HNI activity.
Employing or seconding staff from private practices could bring a fresh perspective into this exercise.
Also, international cooperation between the countries to deal with cross-border issues and mandatory disclosure and reporting rules can improve the tax compliance by HNIs. In parallel, the Government could also consider training its teams on the complexities involved in the tax matters of HNIs.
Positive results
Focusing on the HNI segment can produce positive results both in terms of additional revenue and disallowed losses.
In March 2008, the Australian Government has reported additional revenue of A$2,115 million and disallowed losses of A$ 1,752 million as a result of specific focus on HNIs during the period 1997-2008 (source: ATO (2008a)/ OECD publication).
(The author is a Senior Tax Professional, Ernst & Young).
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