India to provide info on US tax evaders

India has agreed to help the US tackle tax evasion by providing it information available with Indian financial institutions on offshore accounts or assets of Americans or their entities. However, for now, the US will not provide India information on Indian entities, though it will exchange information on accounts of Indians.

“The US will give information on foreign accounts of Indian individuals, but not entities. They have assured us of full reciprocity at the earliest. The matter will be reviewed in 2016,” said a finance ministry official, on condition of anonymity.

Under the Foreign Account Tax Compliance Act (Fatca), the new anti-tax evasion law in the US, it can ask other countries and their financial intuitions to provide information about Americans liable to tax in the US. Fatca will come into effect from July 1 this year.

The US has been widely criticised for using pressure tactics to secure information from other countries, without reciprocity.

On April 11, the US Treasury had said it had reached an agreement “in substance” with India on Fatca. However, it is only a draft agreement between senior officials of the two sides and will have to be approved by the Indian Cabinet.

Amit Maheshwari, partner, Ashok Maheshwary & Associates, said this was akin to an in-principle approval, which meant even if India didn’t meet the deadline by signing the agreement by July 1, no penalties would be imposed by the US. He added this would increase compliance costs for Indian entities.

The two sides have agreed to Model 1, instead of a Model 2

arrangement. Under Model 1, financial institutions in India will report information on US account holders directly to Indian authorities and the government will share it with the US; Model 2 requires financial institutions here to report information directly to the US.

An official said the government thought a pact between the two countries in this regard would be better than the US seeking information directly from financial institutions in India, as it would increase “due diligence” pressure on financial institutions. The official added the Income Tax Act would have to be amended to collect banking information for another country.

Rakesh Nangia, managing partner, Nangia & Co, said: “Fatca requires foreign financial institutions to use enhanced due diligence procedures to identify US persons who have invested in either non-US financial accounts or have substantial interest in non-US entities and report this same to US revenue authorities. The intent is to raise tax revenues by imposing a higher rate of withholding tax in cases of non-compliance and check US persons from hiding income and assets abroad.”

If information on offshore accounts and assets isn’t provided to US tax authorities, foreign financial institutions will withhold tax at 30 per cent on payments from sources in the US.

For compliance with Fatca, the Securities & Exchange Board of India and the Reserve Bank of India might soon issue guidelines.

Nangia said while Fatca documentation and reporting guidelines were yet to be released, companies should immediately gear up to modify their internal systems, control frameworks and procedures for timely compliance with these regulations.