The US has extended the December 31 deadline for India to sign an information sharing pact with it regarding overseas investments held by people of both countries. The move gives relief to businesses and individuals sending funds to India from US financial institutions from a 30% withholding tax that Washington intends to charge in the absence of such a pact.
The benefit of the deadline extension (subject to review after a month) will also go to 42 other nations that have, like India, agreed to sign the agreement, but have so far not been able to. Under the pact, India would share with the US IRS details of investments held by American taxpayers in Indian institutions. The US would reciprocate by sharing details of Indians’ investments in US institutions that will help the Income Tax Department fight tax evasion here.
As per US’s Foreign Account Tax Compliance Act (FATCA), US taxpayers have to report at the end of the tax year investments in foreign financial accounts, stock, securities, mutual funds, life insurance or annuity schem-es with cash value above $50,000. Any under-reporting will be caught when IRS receives information from treaty partners.
India has a similar provision in the Income Tax Act, which it had invoked in the case of Cyprus, holding it as a non-co-operating jurisdiction. On November 1, 2013, New Delhi had decided to subject all payments from India to that country to a 30% withholding tax for not facilitating effective exchange of tax information.
Subjecting a huge withholding tax liability on outbound payments to another country is a tactics increasingly being deployed by major economies to elicit information on accounts held in that country by own citizens which are not reported to tax authorities at home. “A jurisdiction that is treated as if it had an inter-government agreement (IGA) in effect, but that has not yet signed an IGA, retains such status beyond December 31, 2014, provided the jurisdiction continues to demonstrate a firm resolve to sign the IGA…as soon as possible,” says an announcement on the IRS website.
The current extension would be reviewed on a monthly basis to assess whether the 43 nations including India should continue to be treated as if they have an IGA in effect, the IRS says.
India’s ability to sign the pact with the US recently came under question when the Supreme Court told the government it should not enter into agreements with secrecy clauses that are not in sync with the Constitution. The court’s concern was that secrecy clauses will prevent naming Indians who hold unaccounted wealth abroad once India receives such information from its treaty partners.
The government, however, believes that without agreeing to confidentiality of information with the sole exception of naming accountholders in tax evasion proceedings, no country will part with information of account holders in that country.
When the finance ministry approached the apex court in mid-October to clarify that its observation on confidentiality clauses does not prevent India from signing more tax treaties, the matter was referred to the Special Investigation Team probing black money cases. The SIT did not raise any objection. However, with the extra time, the finance ministry hopes to get a clarification from the apex court itself.