India is set to sign an agreement with the US by December 31 allowing for confidential bilateral exchange of details of overseas investments held by people in both the countries. The Supreme Court had earlier told the government that it should not enter into agreements with secrecy clauses that are not in sync with the Constitution. However, the court-appointed SIT had later not raised any objection.
By becoming a signatory to the US’s Foreign Account Tax Compliance Act (FATCA) by the year end, India will manage to salvage the US arms of Indian financial institutions from a 30% penal withholding tax on outbound payments.
The income-tax authorities here will get information under this agreement about the undisclosed financial investments by Indians in the US.
The I-T department had recently made it compulsory for people to disclose all foreign assets in tax returns and any unreported US bank accounts can be traced under this information sharing pact.
India’s ability to sign the pact with the US recently came under question when the Supreme Court told the government that it should not enter into agreements with secrecy clauses that are not in sync with the Constitution. The apex court’s concern was that secrecy clauses will prevent naming the Indians who hold unaccounted wealth abroad once India receives such information from its treaty partners. The ministry, 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 bank accountholders in that country.
When the ministry approached the 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 (SIT) probing into black-money cases to take a view.
Sources told FE the SIT has not made any objection to the ministry’s request for consent for signing tax treaties, especially those relating to confidential information sharing. With the judiciary freeing the government’s hand, the India-US deal now looks a reality.
“We are working towards signing the inter-government agreement with the US by December 31. We shall go ahead once the Cabinet clears the proposal,” said a source. The Cabinet is likely to clear the proposal soon.
FATCA is America’s most aggressive crackdown on unaccounted wealth kept abroad by its residents and citizens. The US follows a system of taxing the global income of individuals. With return on financial instruments low in the US, many Americans park their funds abroad, especially in emerging markets like India where interest rate is high.
The US allows an option for banks in countries that do not sign such a pact with it at the government level to directly give banking information to the US IRS and avoid the 30% penal withholding tax. However, to exercise that option, the governments have to agree on that as well. The understanding so far reached between India and the US is only for state-level information sharing.