Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates, Dubai, said: “Along with the consolidation, the market is seeing a different dynamics. The regulations will bring in consolidation in the market, as only those who are committed to the UAE market for longer term would remain.

“We are seeing new players entering the market, some of them being insurtech companies, who are well aware of the commission restrictions, and have customised their business model to suit the revised regulatory framework,” said Singh.

He also said a number of small players have stopped offering life insurance solutions since they no longer see the same profits.

Considerable change

Krishnan Ramachandran, chief executive of Barjeel Geojit Financial Services, Dubai, said: “Post implementation of the BOD49 regulations, the life insurance sector in the UAE has been going through a phase of restructuring and adaptation of the new rules and requirements.

“The major impact of course has been the steep reduction / cap in commissions and the payment of the commissions over the term of the policy.”

He said that this has resulted in a considerable change to the working models of many insurance brokerage firms. However, the timing of the implementation during the covid-19 situation has thrown up many challenges for the life insurance industry especially in the insurance premium front which has witnessed an exponential increase compared to the premiums to the pre-covid period.

This, along with the sharp fall in bond yields during this period, has also impacted the returns to the investors.

“The cost-income ratio for insurance brokers have increased substantially and due to this there are consolidations within the market place,” he added.

On the flip side, there are new players entering the insurance market with a long-term view with business models that are compatible with a BOD49 world.

A number of insurance online entities have also commenced operations. These are evolving in the market place and it will only be a matter of time before they are able to scale up their volumes and create a profitable online transactional platform, Ramachandran said.

Consolidation on course

The economic slowdown triggered by the pandemic and a set of regulatory measures have made it challenging for smaller advisory firms in the UAE to survive, making many of them either buyout targets or exit candidates, said DJ Sengupta, managing partner, Capstone Insurance, Dubai, who had earlier said the advice market in the UAE is ripe for consolidation.

Murali Krishnan, business development manager, Berns Brett Masaood Insurance, Dubai, says: “The market started seeing many mergers and acquisitions. The BOD49 regulations speeded up the consolidation process. Already lots of takeovers are happening.”

Sengupta said there will be more small players wanting to merge with bigger players who are future ready, which means the consolidation process will gain momentum.

The UAE’s rules on upfront commission, fees and mis-selling (BOD49)  have long been expected to be a big catalyst for industry consolidation and elimination of smaller players. Now, it’s happening as a number of small brokers have stopped writing life business altogether, said Anand Singh of BSA.

Krishnan says the current situation is ‘survival of the fittest’ and many small players will be forced out of the market. “Much before the pandemic struck the SME sector was severely impacted by the economic slowdown, but banks were not supportive.

“To a great extent insurance business is driven by the SME sector and most brokers have been driving their business through SMEs. For the small brokerages, the pandemic and the BOD regulations proved to be a big blow,” he said.

Sophisticated market

Apart from the BOD49 regulations by the Insurance Authority, the Central Bank has also issued guidance around consumer protection and the Securities & Commodities Authority has issued a rulebook on code of conduct for the sector, indicating that the markets are becoming more sophisticated and the regulatory framework is also evolving for better.

Advisers are starting to feel the pressure, but they understand that if they want to survive they have to play by the rules, said Singh.

It was expected that the revolutionary regulations would address issues related to mis-selling, upfront payments and overall unspecified commission payouts.

Singh said: “BOD49 has been a step in the right direction and players have found ways around the commission structures by way of overheads commissions etc. While the regulations are a step in the right direction, it will take some time before the complete impact is felt.”

Murali Krishnan said: “For frontline MNCs, this is an opportunity, as they can beat the competition by buying out the smaller firms. The positive is that the market will shrink and to that extent there will be healthy business.”

Although advisers feel the need to offer crypto strategies to retain and/or expand their client base, the volatility coupled with uncertainty and the unregulated nature of the market is pulling them back.

“It is also a fact that most advisers are unfamiliar with the crypto market and they do not want to take the blame of causing losses to clients when tread an unknown path. It is also interesting that even knowledgeable advisers desist from recommending the new age assets,” said Ajay Mehta, director, Vision Ventures International, Dubai.

International Adviser, in April, ran a report saying advisers in the UAE  are circumspect about recommending cryptocurrencies.

Krishnan Ramachandran, chief executive of Barjeel Geojit Financial Services, Dubai, reiterated his views that there is still a lack of clarity and understanding about the asset class by both advisers and investors, and he prefers to classify them as very speculative and volatile investment.

The status quo is that advisers are still not convinced about the regulatory oversight that the various crypto investment platforms offer.

Crypto bull run

Whether advisers vouch for it or not, the crypto market is on a bull run.

Bitcoin is back in the reckoning, reclaiming the $50,000-mark  after suffering a knockdown. Analysts predict that the coin is in for another winning streak.

There is more good news on this front. PayPal has launched its cryptocurrency service enabling customers to buy, hold and sell digitial currencies on the payments platform.

UAE authorisation

The UAE is reportedly planning to authorise digital currency trades.

It has also been reported that an arrangement was endorsed between the market regulator SEC and Dubai Airport Free Zone Authority to offer and exchange of crypto resources inside the free zone. A blockchain-based trade for sugar exchanging was opened in the free-zone last year.

However, advisers have mostly stuck to recommending crypto ETFs as and when they are listed on stock exchanges.

“An emerging Bitcoin ETF segment will be a good option for investors to consider allocating a small portion of their investments to the crypto asset class,” said Ramachandran.

All-time safe favourites

Traditional investment instruments such as mutual funds, bonds, bank deposits, commodity-backed investments,  gold and more importantly equities are the most favoured avenues recommended by advisers.

“These instruments have a risk-free profile. If investors take fancy to cryptos, they should look for cryptocurrencies issued by central banks,” Binoo Nayyar, chief financial officer, TrendRiser Securities, Dubai.

Even gold should form a sizeable share in investors’ portfolio. Veteran investor Mark Mobius recently said that investors should allocate 10% of their portfolios to gold as he expects currencies to be devalued after the unprecedented worldwide stimulus rollout as part of the fight against the economic setbacks triggered by covid-19.

Gold is traditionally seen as a safe haven investment.

This was proved right when investors bought record quantities of gold in the onslaught of the coronavirus pandemic that hit economies and businsses crashed.

India’s digital currency

NRIs have been keenly watching what India is doing about regulating the cryptocurrency market.

The Reserve Bank of India has indicated the use of a digital currency, as fiat money, to reduce dependency on paper notes and reduce the load on transactions.

The central bank digital currencies (CBDCs) would also potentially enable a more real-time and cost-effective globalisation of payment systems, according to the central bank.

The central bank may launch a pilot of its digital currency by December 2021.

The CBDC is different from bitcoin or other cryptocurrencies.  It is a legal tender issued by a central bank in a digital form and is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.

Taxation is a reality that awaits them after enjoying a near tax-free regime by virtue of their status as non-resident Indians (NRIs).

Those residing in the UAE, Kuwait, Oman and Qatar enjoy the benefit of double taxation avoidance agreement between the host countries and India. Benefits can be derived in the case of dividend income, interest on bank deposits and redemption of mutual funds.

But when it comes to income assessment and tax liability, NRIs are apprehensive and confused as they are still clueless on the frequent changes to various tax rules. The recent amendments in Finance Act 2021 brought in several changes, but only expert tax practitioners can interpret the nuances for better clarity and compliance and for deriving maximum benefits.

Ramanathan Bupathy, chairman of Geojit Financial Services, and former president Institute of Chartered Accountants of India (ICAI), who recently hosted a webinar on NRI Taxation, clarified the changes in rules and provided insights on tax implications when NRI status is changed on return to India for good.

Tax on MF redemptions

As far as income from mutual funds are concerned, NRIs are required to pay tax at flat rate of 20% under the income tax rules. However, units in equity-based Indian mutual funds are not equity shares and, therefore, short-term capital gains arising from sale of the units are not taxable in India in accordance with the provisions of article 13(5) of the India-UAE tax treaty.

As a common practice, companies and mutual fund companies are under obligation to deduct tax at source on income from dividends and mutual fund redemptions. NRIs can claim refund in their tax returns when mutual funds give credit on the tax deducted.

Tax liability on rental income

Rental income in India is taxable, and there is no flat rate or DTAA benefits, and therefore tax has to be deducted at source.

“If you are the owner of a property in India, the resident tenant will deduct tax at source and remit to the government. If the owner is a resident of India he will deduct tax at source at 10% of the rental income, provided the rental income exceeds INR 240,000 (£2,355, $3,212, €2,726) per annum. If the owner is an NRI, the resident tenant will have to deduct tax at the highest slab rate of 30%,” Bupathy said.

“In order to get a lesser rate of TDS, some NRIs adopt the practice of giving a local address in the tenancy contract. However, at the end of the year when the NRI files tax return under his NRI status, the income tax department will raise question to the tenant as to why tax was not deducted at higher rate of 30%.

“That means an NRI should not give a local address when renting out his property in India to a resident of India. The income tax department has to be furnished a lower deduction certificate (LDC) to get tax benefits.”

Three categories of residents

India’s tax regime categorises three types of residents: Residents, non-residents (NRIs) and ‘not ordinarily residents’.

Ordinary residents have to pay tax on their global income; for NRIs, only income in India will be included — for tax purpose — and not global income.

For ‘not ordinarily residents’, income in India is included and income outside India is included only when it accrues or arises from a business controlled from India, or profession set up in India.

The NRI status is crucial in determining and individual’s tax liability. As per the amended rules in 2020, persons residing in India for more than 120 days (brought down from 182 days) in a financial year are considered residents. If an NRI stayed in India for more than 120 days, he would lose his NRI status.

Bupathy suggested that the following types of persons should restrict visit to India to 119 days in a financial year:

• Individuals deriving dividend income from companies in India;
• Individuals deriving income from mutual funds in India;
• Individuals engaged in business controlled from India;
• Individuals engaged in profession set up in India;
• Individuals planning to limit his income from Indian sources to the maximum of INR 1.5m per annum.

Time your return home

He added: “NRIs planning to return to India for good should time their journey in such a way that their tax liability in India is reduced to the minimum as the change of non-resident status to resident will obligate them to pay taxes on their global income, including his end of service benefits such as gratuity.”

It is suggested that NRIs should plan their return to India during the last two months of the financial year, ie in February or March, in which case he will be allowed to retain his NRI status for one year and ‘not ordinarily resident’ status for one more year, and third year onwards he will be considered resident of India.

Another deposit account

Persons residing outside India can open NRE account with banks and interest is exempted from tax so long as he is residing abroad.

The moment he comes back to India on a permanent transfer of residence, he will cease to be a person resident outside India and the interest income from that day onwards on the NRE deposits will be chargeable to tax in India.

Only interest on the deposits, not capital, will be chargeable to tax.

“If the NRI wants to make a small benefit, there another account:  RFC account (resident foreign currency account). If they open RFC account, the balance in NRE account can be transferred, and if they come back to India, then interest on the RFC account will get exempted till such time the retained status of ‘not ordinarily resident’. After return to India they can continue to be ‘not ordinarily resident’ , so interest on that account will continue to be exempted from tax for two years. However, there is a catch: The interest rate on RFC account is lower than that on the NRE account.

“Transfer a part of your money to the RFC account and retain the RFC account to benefit from dollar-rupee exchange rate fluctuations. This money will facilitate you to provide for the education of your children abroad and for destination marriage of your children abroad, who you need foreign exchange,” Bupathy said.

Click here to read International Adviser‘s earlier coverage of the webinar: What NRIs need to know about tax liability

Amendments to the Finance Act 2021 have given rise to debate on the criteria used to define NRI status, qualification of people who are resident but not ordinarily resident (RNOR), treatment of various incomes for liability, tax deducted at source, applicable tax rates and taxation under double taxation avoidance agreements for NRIs in the Gulf region.

Ramanathan Bupathy, chairman of Geojit Financial Services, and former president Institute of Chartered Accountants of India (ICAI), recently hosted a webinar on NRI Taxation 2021.

In it, he clarified various taxation rules, procedures, tax computation, compliance, reporting requirements, dividend tax, income from mutual funds, capital gain tax, tax on income from bank deposits and tax implications at the time of return to India and tax deducted at source as per the latest amendment in rules.

Dividend income confusion

Rules on dividend income get changed fairly often and there has been a great deal of confusion as far as tax liability on dividend income is concerned.

NRIs who invest in shares derive dividend income in India and many are confused about whether dividend income is chargeable to tax.

For dividends declared on or after 1 April 2020, the tax liability has been shifted to the shareholder; which means the individual shareholder has to pay tax.  There has been doubt whether dividend income up to INR 1m (£9,680, $13,409, €11,337)  is exempted from tax.

Bupathy clarified that, from 1 April 2020, this INR 1m limit no longer exists, which means all dividend income is chargeable to tax.

When companies deduct tax

Companies are required to deduct tax at source on dividend income. For residents they deduct tax at 10%, and for NRIs the tax rate is 20%  plus surcharge and education cess.

However, for NRIs residing in countries that have signed double taxation avoidance agreements (DTAA) with India – the UAE, Kuwait, Oman and Qatar – the tax on dividend income is 10% plus education cess.

In the case of Saudi Arabia, it is 5%. However, as there is no DTAA between India and Bahrain, NRIs residing there have to pay dividend tax at 20%, plus surcharge and education cess.

“If there is a double taxation avoidance agreement, the assessee can choose either the tax rate as per the income tax law or the tax rate as per the applicable DTAA, whichever is favourable to him,” Bupathy said.

If an NRI is availing the benefits of a DTAA, he has to furnish documents such as self-attested PAN card, beneficiary declaration, tax residency certificate and self-attested passport copy.

“If you are shareholder of more companies, it is a cumbersome process to furnish these documents to each of the companies. Such NRIs can file their income tax returns at the end of the year and claim refund by furnishing the lower deduction certificate.”

If the documents are not furnished, the companies will deduct tax at 20% and will deny the benefit under DTAA.

Bupathy clarified that when assessees are given a concessional rate of tax for computing the dividend income, they cannot claim expenses for the income if he has borrowed money for the purpose of investing in shares.

This means, thatinterest on the amount borrowed cannot be claimed as a deduction.

Interest on bank deposits

NRIs usually maintain two types of accounts: NRE (non-resident external) and NRO (non resident ordinary) accounts.

Under NRE accounts there are two sub-types: NRE Rupee Account and NRE FCNR (foreign currency  non repatriable) account.

Interest on NRE accounts is fully exempted.

In the case of NRO account, interest is chargeable to tax.

Banks will deduct tax at the higher slab of 30%, and NRIs can claim a refund while filing their tax returns. Like in the case of dividend tax, NRIs residing in DTAA countries are charged only 12.5% tax on income from NRE deposits.

Joint accounts

The taxation expert advised NRIs against having joint investments and operating joint accounts with banks.

In the event of any unfortunate events such as death, the survivor can withdraw the money and investments.

However, joint investments may create complications as far as TDS and DTAA are concerned, as the individuals have different sources of income and have to be treated differently.

In order to avoid such complications, it is suggested to make the other person a nominee rather than a joint holder for easier transferability.

Tune in next week for more insights about NRI tax liability.

“Portfolio management schemes (PMS) are ideal for investors seeking long term wealth creation through investment in high growth potential companies as the schemes offer opportunity to outperform the index and mutual funds,” said Satish Menon, executive director, Barjeel Geojit Financial Services.

Advisers are attracting investors by saying a PMS strategy involves investing in prospective businesses with visionary management, which have the potential to scale up and grow exponentially over a five to six year period and to generate risk-adjusted returns to the tune of at least 20% on INR basis.

More for PMS

Though a large number of retail investors prefer mutual funds as a means of investing in stocks, there is a growing number of investors with sizeable allocable surplus going for PMS.

The schemes are positioned to invest predominantly in equities of mid cap and small cap companies that have a sound track record, quality management, earnings and growth potential and strong fundamentals.

The strategy is to invest across a wide gamut of fundamentally strong businesses in the large cap, mid cap and small cap stocks by identifying mispriced stocks with high growth potential and available at reasonable valuations.

Short-term strategy

Barjeel Geojit research analyst Balaji Vaidyanathan said the short-term strategy for an investor is that they should be ready with the shopping basket at this point in time and be prepared to buy some of the stocks that may experience a sharp correctection because of covid.

“These issues are transient and not permanent in nature. So whether there is covid or no covid there are always opportunities in the market. There are some sectors which will do extremely well during covid. Any strategy that is over weight on IT, pharma, specialty chemicals, real estate, manufacturing, commodities, new age businesses and home improvement sectors will do extremely well over the next two to three years,” he said.

As per the guideline of the market regulator Securities and Exchange Board of India (Sebi), any investor who needs to invest in PMS, the minimum ticket size is INR 5m ($67,223, £48,405, €55,677).

It is a single investment of INR 5m. There is no entry load, but the exit load is 1% on redemption before one year, applicable for full as well as all partial redemptions.

PMS vs mutuals

PMS are specialised investment vehicle for lump sum investments. The portfolio manager invests the money in shares and other securities and manages the portfolio on behalf of the client. The client can look at where the portfolio manager is investing client’s money.

Mutual funds use the pooled accounts for the funds and securities whereas PMS use a separate bank account and demat account for each client. Minimum investment amount for a mutual fund is INR 5,000. In PMS, investors can take positions in even slightly illiquid name.

PMS is concentrated in nature by design, so there is a concentrated set of stocks, the number of stocks is around 30 to 35, whereas in mutual funds the number of stocks is in excess of 70.

The market value of mutual fund holding is calculated on the basis of Net Asset Value (NAV) of the units held; whereas in PMS it is the total of the market value of the securities in demat account and cash in bank account of the client.

Mutual funds revise their portfolio on a monthly basis through their factsheet, whereas in PMS the investor can see the portfolio daily through their individual demat account.

Mutual fund charges are capped by the market regulator Sebi whereas PMS fees are not based on any guidance by the regulator, except for the minimum investment stipulation of INR 5m.

Financial planners are of the view that PMS are ideal for large investments and also carry a higher degree of risk, whereas mutual funds are simpler investment tools, but the returns are relatively lower.

In terms of transparency of the portfolio, in PMS an investor can see their portfolio every day, whereas in a mutual fund the investor will be able to see it at the end of a quarter or six months.

“With the flexibility that PMS mandates provides, they have potential to do better than mutual funds but it needs more maturity and risk tolerance from investors,”  Vaidyanathan said.