A higher tax burden on the super-rich in India will spur demand for offshore investments in the high net worth (HNW) space. Providing sound tax advice is paramount to mitigate investors’ desires to channel wealth abroad and avoid losing assets under management to offshore providers, says GlobalData.
As part of India’s 2019 Budget, which was released at the beginning of July, finance minister Nirmala Sitharaman announced that the surcharge for those earning INR20m–50m ($292k–729k) will be increased to 3% and for those earning above INR50m to 7%. This will up the peak effective tax rate to 42.7%, bringing it more in line with developed countries in the West as opposed to developing nations in the East.
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Data from GlobalData’s Global Wealth Managers Survey shows that taxation is already a big headache for local HNW investors. Among the 24 countries surveyed, India ranks highest in terms of HNW demand for tax advice, with 98% of respondents describing demand as “quite” or “very strong.” In addition, tax efficiency is the prime reason why HNW investors hold wealth abroad. While the importance of this driver is decreasing in most countries in light of the numerous scandals that have shaken the offshore industry, it remains twice as important in India than globally.
Officially, the country’s capital controls put a limit on overseas investments. Since 2013, Indians can only remit $75,000 a year, down from the previous $200,000 limit. However, so far this has not deterred the country’s millionaires: GlobalData shows that 16.2% of Indian HNW wealth is booked abroad. While comparatively low when compared to the wider Asia Pacific region, this is in line with the global average of 16.9%.
Given the importance of tax as an impetus for holding wealth offshore, this proportion is likely to creep up, with local wealth managers set to compete for a smaller pool of funds. To mitigate the need for HNW investors to channel wealth abroad, wealth managers will do well to up their game when it comes to the provision of tax advice.
Being able to provide sound advice to help HNW investors reduce their tax liabilities in a legal manner – be it through the use of trusts, insurance policies, or other vehicles – is becoming increasingly important, especially as tax rates for the rich are becoming more and more punitive.
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By GlobalDataFor now, the introduction of the highly debated inheritance tax has been delayed. However, as the government seems keen to overhaul its tax system and boost revenue, HNW investors will remain nervous, relying on their advisors for advice.
