The negotiations and discussions between India and the US have commenced for an Inter-Government Agreement (IGA) to be signed between the two countries under the Foreign Account Tax Compliance Act (FATCA), a senior official said.
The new Act requires the US government to sign IGAs with various countries, including India, where American individuals and companies may hold accounts and other assets.
While FATCA became a law way back in 2010, the final regulations were issued for it in January 2013 and it is set to come into effect from July 1, 2014 after signing of IGAs with different countries.
FATCA aims to check and impose withholding tax on illicit activities of some wealthy individuals who use offshore accounts to evade millions of dollars in taxes.
Once this new Act and the Indo-US IGA come into effect, all financial institutions in India would need to carry out a detailed due diligence on all their clients and report details of their US clients to the US tax department (Internal Revenue Service). This would also be the case for all other countries who enter into FATCA agreements with the US.
Any non-compliance of the FATCA provisions would result in penal withholding of 30 per cent of the total US-source income of such financial institutions.
In India, Sebi was asked to examine the applicability of the FATA provisions to all market intermediaries regulated by the capital markets regulator. This was examined by Sebi in coordination with the Finance Ministry.
According to the official, necessary comments and suggestions have been provided to the Ministry and pursuant to the government directions, Sebi would issue appropriate guidelines in 2014-15 to market intermediaries on due diligence and reporting requirements with respect to FATCA.
Sebi has consulted stock brokers, mutual funds and foreign institutional investors, among others in this regard.
Finance Ministry had also asked banking regulator RBI's views and suggestions on the proposed IGA, while Sebi was asked to provide inputs regarding its jurisdiction.
Earlier, the FATCA agreement was expected to come into force in January 2014.
Once implemented, the agreement would provide the US tax department, the Internal Revenue Service (IRS), access to details of all offshore accounts and assets beyond a threshold limit held by Americans here, while a reciprocal arrangement could be offered for Indian authorities as well.
The US has so far signed IGAs with 22 countries in this regard, including the UK and Switzerland, while talks are on with many other jurisdictions, including India.
Once the FATCA pact is implemented, non-compliant entities and persons would be subject to heavy penalties.
Last month, the US Treasury Department and Internal Revenue Service issued "last package" of regulations for implementing a law targeting overseas tax evaders.
FATCA has emerged as a global standard for detecting offshore tax evasion, as countries from across the world, including India, step up their vigil for details about foreign assets of their own individuals and companies.