It is vital for Indian students going abroad to pursue their education to understand the tax differences that exist between India and the UK. Gaining information regarding the tax system of the UK will definitely help the students manage their financial situation and enhance their overall well-being in the foreign country.
This information would help the students to avoid double taxation, plan their finances effectively, and maximize their tax benefits, etc.
In simple words, tax can be defined as the mandatory extraction of money by a public or a sovereign authority for the public purpose. In India, there are mainly two types of taxes, and they are direct and indirect taxes.
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One of the most common examples of direct taxes is income tax, and it is progressive in nature. Indirect taxes generally tend to be regressive in nature. As the name suggests, indirect taxes are imposed on goods or services rather than income directly. One of the significant changes brought to the indirect taxes in India is the introduction of the Goods and Services Tax (GST).
Due to the efficient administrative system prevalent in the United Kingdom, the tax system is simple and very easy to comprehend. As a part of taxation in the UK, taxation may involve payment to at least three separate levels of government. The well-equipped equipped administrative machinery in the United Kingdom not only increases the effectiveness of the tax system.
The UK has one of the world’s highest-taxed populations. The UK’s financial year or tax year runs from April 6th to April 5th. His Majesty’s Revenue and Customs (HMRC) is the entity responsible for setting the tax rates, collecting taxes, and providing funds for public services like child benefits, housing benefits, and income support.
The UK’s tax system consists of a huge list of taxes, and they include income tax, value-added tax (VAT), excise duties, tobacco and alcohol tax (sin tax), national insurance contributions (NIC), corporation tax, customs duty, capital tax, etc.
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As discussed above, there are numerous taxes levied by the UK government, but Income tax, National Insurance Contributions, and value-added tax are the three main revenue-generating taxes in the country.
The largest source of revenue for the UK government is undoubtedly from the income tax, which accounts for over 30% of the total revenue. The UK resident’s foreign income is taxed as UK income; however, to avoid double taxation, the UK has agreements with several nations.
As discussed above, the main source of direct tax in the UK is from the income taxes. The income tax is a tax levied on taxpayers’ wages or earnings, if they are self-employed.
In the case of income taxes, a progressive system of taxation has been employed.
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The UK employs a Pay As You Earn (PAYE) system, which deducts income tax and National Insurance from an employee’s monthly salary.
Indirect taxes are levied on products and services. The most well-known type of indirect tax in the UK is value-added tax (VAT), which is the third largest source of the government’s revenue. It is the tax on consumer expenditure. In the UK, value-added tax, or VAT, has already been added to the sticker price.
The UK has entered into tax treaties with other nations in an attempt to reduce double taxation, particularly by reducing or eliminating withholding taxes between the countries.
A tax treaty, also known as a double tax agreement (DTA), is an agreement between two nations to prevent or reduce double taxation. Tax treaties may cover a variety of taxes, including income taxes, inheritance taxes, value-added taxes, etc.
The Double Tax Avoidance Agreement (DTAA) between India and the UK was signed on October 26, 1993. The agreement consists of 31 articles in total.
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Both India and the UK are responsible for mitigating double taxation on income earned by residents of these nations in either India or the UK, as a result of the above agreement. Anybody living in the UK for at least 182 days in a financial year is entitled to tax exemptions under the above agreement.
Many students in the UK who work at the same time believe that their money is not taxed. But this depends on a variety of variables.
A proper understanding of the taxation followed in the UK will help the Indian students navigate through the challenges faced. Students from abroad have the right to do part-time work, but this depends on which country they are from and their immigration status.
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In UK domestic law, students have no special status in the UK tax system. So, in general, students are subject to UK tax and National Insurance contributions in the same way as other UK taxpayers.
The main challenges faced by the students going to the UK to pursue their studies include difficulty in understanding the country’s tax laws, determining tax residency, making sure that they are not taxed twice, tax filing and reporting, etc.
Foreign students need not pay tax if their earnings or profits are spent on needs like course fees, study materials, rent, bills, and food. The students need not pay taxes if they are sponsored by an overseas entity that expects the students to work during their part-time.
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A limited number of students are eligible to the UK loans and the same are not taxable.
Going and studying abroad is appealing but it also has its difficulties. It is always good if the students plan a budget.
It is advisable to practice tax planning.
Students should be aware of the potential harm of double taxation.
The financial supports such as scholarships, employer – sponsered etc are not liable to be taxed.
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