India is set to seek time beyond January 31 for signing a deal with the US for helping each other track down the wealth people stash with financial institutions in the other nation without reporting it to their domestic tax authorities.
The extra time for India to sign the information sharing pact, which is likely to be granted by the US, would mean that American financial institutions wouldn’t have to enforce a 30% penal withholding tax on payments made to Indian clients from February 1.
When the US extended the earlier December 31 deadline for other nations to sign the pact under its Foreign Account Tax Compliance Act (FATCA), it had a rider that the treatment given to countries such as India — which have agreed in substance but have not signed as having an agreement in effect — would be reviewed every month for possible withdrawal of that status.
For retaining that status a country needs to show its resolve and concrete steps taken towards signing the deal. Sources told FE that the finance ministry is working diligently on this. “We are trying to shorten the procedure for getting approval for the deal but taking various regulators and other agencies of the government on board invariably consumes time,” a person privy to the development said.
Withdrawal of the partner status would force US financial institutions to impose penalty on payments to clients in countries that do not share information about Americans’ investments in that country. US allows the option for overseas financial institutions to share information about US accounts directly to the IRS, but the understanding India has with the US is to share the details at the government level.
Under FATCA, US tax payers have to report at the end of the tax year investments in foreign financial accounts, stock, securities, mutual funds and insurance or annuity schemes with a cash value above $50,000.
The US follows a system of taxing the worldwide profits of both US residents as well as citizens who are not residents. For taxing the worldwide income of a US citizen, it requires an efficient reporting system of global income, for which it has legislated FATCA in 2010. In contrast, India taxes the worldwide income of only its residents, while non-residents are taxed only on the income sourced from India.
India would also get information under this pact about Indians having accounts in US financial institutions that are not disclosed to the I-T department here.