Editorial: FATCA force

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Published: July 11, 2015 12:31:00 AM

Info exchange makes stashing money abroad difficult

With India signing the agreement with the US for exchange of information under the Foreign Account Tax Compliance Act (FATCA) to deal with tax avoidance cases, it will increasingly become difficult to escape the Indian taxman by stashing money abroad. FATCA hits at the very root of the tax evasion, done by utilising banking and financial institutions in other countries. Take the case of India, where a big chunk of the country’s black money is reportedly in Swiss banks; it is the lack of information on account holders that is holding back action by the taxman. In the case of the US, however, anyone with any income/assets in the US, not declaring these to the Indian tax authorities will be extremely risky since FATCA requires the signatory country to ensure that the banks and financial institutions operating there mandatorily share all information about any asset accumulated or transactions carried out by such individuals or entities. The advantage for India lies in the US law’s automatic exchange of information (AEOI) window that allows signatory countries to get similar information from the US. FATCA’s biggest plus is—and this is why it is expected to be more effective than the existing tax information exchange window—the stringent penalty clause for those financial institutions not complying with it; any bank defaulting on information sharing will have to pay 30% of its overall US revenue by way of penalties.

While the Act will help India track and deal with tax evasion through the US effectively, it is important to ensure this becomes the template for revising all the tax information exchange agreements that India has signed with 15 countries, and the ones being worked on with another 30 countries. So, those still thinking about missing the black money compliance window the government has offered till September, will do well to utilise it to disclose their unaccounted income stashed abroad, and escape prosecution and a 120% tax and penalty from next financial year by paying just 60% overall, by December. The income tax department might have had a poor track-record in getting information from other countries in the tax evasion and black money cases, but with an easy and regular flow of details through FATCA-like pacts, it will be well-equipped to identify and track the flow of ill-gotten wealth. A G-20 tax information exchange framework is also in the making. At the end of the day, the taxman’s ability to get at untaxed incomes depends on how much information is available—in the case of domestic black money, it is the annual information returns that serve as a good source of information—and thanks to FATCA, a big breakthrough has been made on incomes/assets of Indians living in the US.

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