IT is ironic that a provision in the British tax system that is a relic of its colonial past and persists for over 200 years is about to destroy the chances of one of the finest examples of the counterflow of colonialism that marks the UK today. Rishi Sunak, a second-generation British Citizen of Indian origin threw his hat in the leadership race of the Conservative party following the announcement by Boris Johnson to step down from the Prime Ministership of the UK. He did so and started a process whereby more than half of Mr. Johnson's own Cabinet Ministers expressed their no-confidence in his leadership following unending scandals emanating from No10 Downing Street. Most damaging of these was the frolicking parties in No 10 while he was exhorting his countrymen to refrain from going out and socialising when COVID 19 was ravaging the country.

Rishi's story is not a typical rag to riches story of an immigrant. Both of his parents migrated from East Africa. His father was a GP and his mother was a trained pharmacist and used to run a pharmacy in Southampton. The parents indeed spent a lot of money in bringing him up, sending him to a private school, Winchester College where the fees are supposedly prohibitive. Later he went to Oxford studying philosophy, politics and Economics and thereafter moved to the US on a Fulbright scholarship to study Master in Business Administration at Stanford University. Here, he met and subsequently in 2009 married Akshata Murty, daughter of the venerated Narayan Murthy of Infosys. Subsequently, the couple relocated to the UK, with Rishi in investment banking working with Goldman Sachs and then with a Hedge fund. Akshata is a successful investor and businessperson owning shares in two of Jamie Oliver's restaurant businesses, Wendy's in India, Koro Kids and Digme Fitness (Source: Wikipedia).

Akshata is an Indian citizen and intends to remain so. Apparently, Rishi retained his green card that was valid till 2021. The couple apparently donated GBP 100,000 to his old school at Winchester.

Rishi is now a three-time Member of Parliament from the Conservative party winning his seat in Richmond, in 2014, 2017 and 2019, each time with increasing margin. He was first appointed by Theresa May as Parliamentary Under-Secretary of State for Local Government in 2018. He became an ardent follower of Boris Johnson and was a Brexiteer. In 2019, Boris Johnson made him Chief Secretary to the Treasury where he reported to Sajid Javid another minister in the conservative government with roots in the sub-continent. Following Javid's resignation, Rishi was made the coveted Chancellor of the Exchequer in February,2020.

As Chancellor, he gave a good account of himself and is credited with the successful implementation of emergency support for business as well as the furlough scheme for the employees, providing grants to employers to pay 80% of a staff wage and employment costs each month, up to a total of £2,500 per person per month. His popularity however suffered following the Russian invasion of Ukraine and the consequent price rise and inflation. Particularly unpopular was perhaps the increase in National Pension Contribution rate.

In the meantime, Boris Johnson was getting caught up in numerous indiscretions starting with the party gate, initially denying knowledge, and subsequently admitting and apologising. Both the PM and Rishi was fined by the police. Besides, he also covered up for his cronies and their shenanigans. Thus, it was following his appointment of Chris Pincher as Deputy Chief whip despite the knowledge of his sexual indiscretions, that there was turmoil in the party.

It was following this incident that Rishi resigned stating that it has become untenable to be in the cabinet. That opened a food gate of resignations by other ministers that finally forced Boris to announce his own resignation. Boris apparently nursed a grudge against Rishi for his infidelity and when Rishi threw his hat in the ring, he asked his supporters to vote for anyone but Rishi.

Subsequently, following a leak, The Independent newspaper published a news that Akshata had claimed the non-dom status in her tax return and thereby sheltered substantial amounts per year in taxes. Coupled with the fact that Rishi had raised national insurance contribution for ordinary taxpayers and the prevailing high inflation, it was alleged that this was an act of hypocrisy when the chancellor put tax burden on ordinary people but his own wife was sheltering millions of pounds in tax.

Akshata holds a tiny 0.93% of the total shares of the Indian company Infosys founded by her father. However, the dividends declared by the company even on this tiny amount of shareholding came to a hefty 11.5 million pounds/per year. It may be recalled that following the Russian invasion of Ukraine, Rishi as the Chancellor had asked British companies to leave Russia so as to cause maximum pain to Russia. Many Western companies including the ones from the UK stopped their operations in Russia. Infosys is an Indian company and India continues to maintain good relations with Russia. Infosys normally had no reason to leave Russia. It was therefore alleged that Murty was collecting 'blood money' from Russia in the form of her dividends from Infosys. Ultimately, Infosys also stopped its Russia operation but the charge of hypocrisy stuck.

In the race for the leadership of the party, there were initially eight contenders and subsequently through a process of elimination, the final two candidates for the PM post came down to Rishi Sunak and Liz Truss. Although Rishi had the support of 137 of the Tory Members of Parliament than his contender Liz Truss, who got 113. Nevertheless, it seems that Liz Truss is leading by almost 30 points amongst the ordinary Conservative members who will finally decide the winner to be announced in the 1 st week of September. Liz Truss and her supporters are essentially canvassing for reduction in taxes while Rishi is making the common-sense point that the welfare measures cannot be run in vacuum. It is fascinating to see that taxation policy is going to ultimately decide the choice of the British PM. However, it is not my intention to discuss and compare the promises of the two candidates. Rather, we will try to trace the history of the controversial non-dom status of Akshata that seems to be, at least, on the surface, the main reason of Rishi's downfall.

This is not the first time that the non-dom issue has raised the heckles of the British political parties. In 2015 General Elections, the Labour party had campaigned for its total abolition. The position of the Tories has been more nuanced and there are many who claim that the tax benefits that are accorded through this measure is but a small price to pay for making the UK the magnate of international talents, particularly in the financial sector. The benefits have also been pruned down over the years and now comes with a price. It will therefore be instructive to note the evolution of the phenomenon over time.

Normally, all countries claim world-wide taxing right over the income of their residents. Again, generally speaking, residence is a concept different from citizenship and depends on the stay of the individual in the country sometimes accompanied with some other criterion like the maintenance of a habitual abode there. The USA, is an exception and demands taxing right over all its citizens. In the UK also the ordinarily resident taxpayers have to pay tax on their worldwide income. However, a taxpayer whether resident or non-resident, is given a choice of not-being charged on the income earned abroad, if he/she happens to be not domiciled in the UK (the so-called non-doms). The concept of domicile however is different from residence or citizenship and in that respect, it can be said that the UK taxation system is unique. It has however an intimate connection with the phenomenon of British colonialism and the apparent social contract of the State not to interfere with the foreign income of an influential class in the British social system.

According to John Avery Jones, the first income tax was imposed in France by Louis XIV in 1710 and was a tax on real property, salaries, securities and businesses and hence there was no question of taxing foreign income. General income tax as we know today was first imposed by William Pitt in 1799 to fund the war with France. In other countries of continental Europe there was no general income tax, rather there were various impersonal taxes. Although the general income tax initially was very unpopular in that it asked questions about the income of people which was a very private affair at that time, ultimately, the general income tax became the norm, not only in the UK but also elsewhere in the world.

Avery Jones identifies three features of the taxation of foreign income in the UK that still follows the principles laid down in 1799- the first is the 'arising' basis- "interest arising from foreign securities" and "income from foreign possessions" ; the second feature is that Pitt's two categories of foreign income treat foreign income as a separate type of income unrelated to the categories of domestic income, such as trading profits, interest etc and the third is the remittance basis , by which all, foreign income was taxed to the extent, and at the time, it is brought into the United Kingdom. (Source: Taxing Foreign Income from Pitt to the Tax Law Rewrite- the Decline of the Remittance Basis- John F Avery Jones)

The third factor is the most important in the context of the discussion of the tax treatment of foreign income in the UK. And the rationale of the same is explained by Avery Jones as follows:

"We tend to think of the third feature, the remittance basis, as entirely different from taxing income on the arising basis and having to do with movements of money through the international banking system. Its origin was very different and, because of the business changes that have taken place since Pitt's time, the remittance basis may now seem even more different from the arising basis than it did originally. In Pitt's time most foreign trade was with the colonies. The dearth of any markets abroad coupled with rules requiring important colonial produce to be shipped to England in the first place meant that the remittance basis, so far as trading income was concerned (and there was probably little other foreign income), was essentially a basis that charged tax when the produce was sold, necessarily in England. Even in other cases , the system of payment necessarily by bills of exchange, rather than, as now, moving money through the banking system, meant that foreign income would be remitted. It merely meant that the tax was postponed until the income was received in money. It was therefore more of a timing provision than one where remittances were voluntary. When trading evolved and this ceased to be true, the Revenue's attack changed to disputing whether the trade was a foreign one, on which they were broadly successful in the courts. To which taxpayers countered by trading through non-resident subsidiaries, on which in turn taxpayers were broadly successful in the courts, although the courts developed a strict definition of non-residence for companies."

Thus, to begin with all foreign income was taxed on remittance basis in the UK. Then in 1914, the remittance basis was changed for some kinds of foreign income that were intentionally left abroad by the very rich for reinvestment and the remittance basis was removed for such types of income: income from foreign securities, stocks, shares and rents. However, through a proviso an exception was made for a person who was not domiciled in the UK or being a British subject was not ordinarily resident in the UK and for them the remittance basis continued. It is thus that domicile became an important criterion for the purpose of income tax for the first time in 1914.

Then in 1940, during the war, the remittance basis was restricted to trading income, but only where the income was immediately derived from carrying on the trade either alone or in partnership, and to employment and pension income. In 1965, a company ceased to be taxed on remittance basis.

The Non-dom status is thus a long standing and deliberate feature of the UK tax system. There have been occasional flare ups whenever any egregious event came to the surface. Some changes have taken place over the years and the system has been streamlined to a certain extent and the main contours of the present system in place as gathered from the HMRC website explains the same.

The domicile status of a person is decided under general law, interpreted according to previous rulings of the courts. Some of the main points relating to domicile are that one cannot be without a domicile, that one can have only one domicile at a time, one is normally regarded as domiciled in the country where one has his/her permanent home, that one's existing domicile will continue until he/she acquires a new one..

Most importantly, there are 3 types of domiciles: domicile of origin, domicile of choice and domicile of dependence. It is normally difficult to displace the domicile of origin which is acquired from the father when one is born. Usually, the domicile of origin is the country where one is born but if someone is born in a country but his/her father was not domiciled there at the time of the birth, then the domicile of origin will be the father's country of domicile.

The fact that one is born in the UK does not automatically mean that he/she is UK domiciled; for example, when one is born to a non-domiciled father or one moves to live indefinitely to a different country by exercising the domicile of choice. Broadly, to acquire a domicile of choice one must leave one's current country of domicile and settle in another country. At the age of 16, one can acquire a domicile of choice if one is already living in a country other than that of the domicile of origin and he/she intends to remain there permanently or indefinitely.

If one is a non-dom, his foreign income is not charged to tax in the UK till such time that the income is brought in the UK. Non-dom status also affects the Inheritance tax similarly. Considering the recurrent controversies, there is now a provision of deemed UK domicile . From 6 April 2017, an individual who is not domiciled under English common law will be treated as domiciled in the UK for tax purposes if they meet 1 of 2 conditions.

Condition A -the individual:

Condition B – the individual:

Different contingencies like when a child is born out of wedlock/ adoption etc can pose complex problems and HMRC has given a set of flow charts to work out the correct domicile status.

According to the HMRC guidance, if a UK tax resident is not domiciled in the UK, he/she has to make a choice for each year either to be taxed on arising basis or on remittance basis in respect of the foreign income. For the first seven years of residence in the UK, there are no charges. But, for long-time residents i.e., those residents in the UK for more than 7 years, a charge known as remittance basis charge (RBC) becomes payable. From 6 April 2017 there are 2 levels of charge: £30,000 if one has been UK resident in at least 7 out of the preceding 9 UK tax years and £60,000 if one has been UK resident in at least 12 out of the preceding 14 UK tax years.

(Source:) Guidance note for residence, domicile and the remittance basis: RDR1 - GOV.UK (www.gov.uk)

It seems that despite controversies regarding the use of the remittance basis by many high-profile non-doms, opinion is divided as to its merits or otherwise. In the current charged scenario, the labour party has clearly promised to abolish the same. Shadow Chancellor Rachel Reeves said Labour would replace it with a modern scheme for people who are "genuinely living in the UK for short periods to allow us to continue to attract top international talent."

The Liberal Democrats have said that government ministers' partners should not be allowed to hold non-domicile status. Currently ministers are not allowed to be non-doms, but this rule does not apply to their immediate family.

However, in the Conservative party, there are many who think that the system allows the UK to attract talents and the claim is also not without charges. In fact, a 2016 discussion paper stated: "The government wants to attract talented individuals to live in the UK who will help to contribute to the success of this country by investing here and creating jobs. The long-standing tax rules for individuals who are not domiciled in the UK are an important feature of our internationally competitive tax system"

On the other hand, there are others, particularly the advocacy groups that consider such a system to be unfair to the majority of the UK residents who are treated differently. Besides, as pointed out by Prem Sikka of Tax Justice, the non-dom status facilitates avoidance and distortions. He gives the example of professional footballers, who although paying tax in the UK on their wages, invariably register a company in some low tax jurisdictions where the income from the exploitation of their image rights and other streams of income are accumulated.

Many high-profile individuals including the former governor of the Bank of England have claimed the non-dom status as allowed by the law. But, the attack on Rishi Sunak and Akshata has been particularly vicious, perhaps because it is a case of the wife of the Chancellor of the Exchequer and a contender for the post of the PM.

The initial reaction from the spokesperson of Akshata was also not very carefully crafted. According to news reports, a spokesperson for Ms. Murty initially said that she had to use non dom status because of her Indian citizenship. 'India does not allow its citizens to hold the citizenship of another country simultaneously,' they said. 'So, according to British law, Ms Murty is treated as non-domiciled for UK tax purposes. She has always and will continue to pay UK taxes on all her UK income.'

Critics were quick to point out that citizenship has nothing to do with domicile and that it was an optional feature of the UK tax system. She however made amends subsequently and announced that she would be voluntarily paying taxes on worldwide basis henceforth meaning thereby that her Indian income will also be subject to the UK taxes. Her statement in this regard is significant:

"It has become clear that many do not feel it is compatible with my husband's role as Chancellor. I understand and appreciate the British sense of fairness and I do not wish my tax status to be a distraction for my husband or to affect my family."

"This means I will now pay UK tax on an arising basis on all my worldwide income, including dividends and capital gains, wherever in the world that income arises. I do this because I want to, not because the rules require me to."

"My decision to pay UK tax on all my worldwide income will not change the fact that India remains the country of my birth, citizenship, parents' home and place of domicile. But I love the UK too. In my time here I have invested in British businesses and supported British causes. My daughters are British. They are growing up in in the UK. I am so proud to be here." (Source: https://inews.co.uk/news/politics/rishi-sunaks-wife-akshata-murty-gives-up-non-dom-tax-status-and-promises-to-pay-uk-tax-on-worldwide-income-1566258)

I have not closely followed the debates between Liz Truss and Rishi Sunak. But, it seems obvious that Rishi has more of policies while Liz is focussed on tax cuts. Writing for Project Syndicate ( Rudderless Britain) and after the resignation of Boris Johnson, Chris Patten coined a term that may well define the outcome of the Conservative Party election. He said that Britain was now suffering from 'Long Boris" and lamented that the candidates to succeed Johnson were trying to win votes with reckless proposals like ever-larger tax cuts, ignoring the fact that, without responsible spending reductions, the only way to afford across-the- board tax cuts would be to plant what conservatives used to denounce as a "magic money tree."

"Such cuts would not address soaring inflation, either. They would, however, lead to further downward pressure on the pound, higher interest rates, and financial turbulence. By proposing them, the principal candidates to lead the Tories have shown an utter disregard for the fiscal responsibility that has long been regarded as a core Conservative principle.

There is one exception. Former Chancellor of the Exchequer Rishi Sunak refuses to abandon the notion that expenditure should bear some relationship to revenue. A one-time Johnson supporter and a long-time Brexit advocate, Sunak is now being targeted by Johnson's supporters over the tax issue, largely because he helped to ensure Johnson's eviction from high office."

The same view has been echoed very recently by another Tory heavy weight- Michael Gove who described Liz Truss's campaign as a 'holiday from reality' and expressed confidence that conservative party members would ultimately back Sunak as he promises only what he knows can be delivered.

In the meantime, Liz Truss continues to lead in opinion polls and is also the bookies' favourite. Some want Boris Johnson back citing the lack of charisma of either of the candidates. Boris Johnson showed up yesterday in Kiev and delivered a fiery speech. In a few days from now, we will know if Britain indeed has 'long Boris' or not.