The government is planning to amend the Income Tax Act to comply with the FATF (Financial Action Task Force) guidelines on beneficial ownership of trusts, a senior finance ministry official told FE.
“The (FATF) guidance is on finding the beneficial ownership of trusts. The idea is to put a structured burden on all the countries for meeting the BO (beneficial ownership) standards. There will be vetting of countries against these guidance in the fifth round of FATF evaluation next year. To comply with it, the Income Tax department in India has to bring out some changes,” said the official.
In March 2022, the FATF agreed on tougher global beneficial ownership standards in its Recommendation 24 by requiring countries to ensure that competent authorities have access to adequate, accurate and up-to-date information on the true owners of companies. The FATF has now updated the guidance that will help countries implement the revised Recommendation 24.
Experts said that trusts in India are used as tax wrapping instruments. “Trusts are often identified by their trustees rather than their beneficial owners. It’s possible that the properties in a trust are registered in the name of trustee/s but the monetary gains from those assets would go to perhaps a citizen of some other country. Under the FATF guidelines, the reporting norms have become stringent for trusts. The guidelines require that the authorities should be made aware of the nature of all transactions and their beneficiaries, and to disclose the information with other jurisdictions,” said Karanjot Singh Khurana of Lakshmikumaran & Sridharan.
“There could be amendments in the Income Tax act to bring in more transparency about the ownership,” said the FinMin official.
In India, the trusts are taxed on the basis of their purpose and source of income. The taxation rules for trusts could be divided into two broad categories: charitable and non-charitable trusts. Charitable trusts get tax breaks for religious or charitable income where donations for religious purposes are entirely tax-free (except for large anonymous donations). Non-charitable trusts are taxed based on income type such as business income which is taxed at 30%, while income from other sources such as interest on investments etc, gets taxed basis different rates depending on how much money the trust has.
Experts said that the compliance with international guidelines will bring in more transparency through widening reporting and compliance around trusts. “This would involve recording more details about the trustees who manages the trust and the beneficiaries who ultimately receives the benefits. Initially there may not be a need to disclose every single beneficiary, but adequate information to understand where the money goes, who it belongs to and who actually benefits out of it could be understood. Probably a new reporting on beneficial ownership could be brought in on a regular basis to keep a track of this which shall be in addition to the annual tax returns,” said Ritika Nayyar, Partner, Singhania & Co.