India and the US on Thursday struck a bilateral deal to track assets nationals of either country hold in the other nation without reporting them to their respective home-country tax authorities.
The information sharing agreement between India’s income tax department and the US’ Internal Revenue Service (IRS) under the US Foreign Account Tax Compliance Act (FATCA) was signed here by revenue secretary Shaktikanta Das and US ambassador to India Richard R Verma. It will be operational from September 30.
The move is expected to help the IRS access details of undisclosed assets Americans including NRIs who are US residents hold in India. Indian tax authorities, on the other hand, would get access to details of American assets of Indians that may not have been reported here, which would also better equip them to tackle the black money menace.
The deal also removes fears of US financial institutions imposing a FATCA-mandated 30% penal withholding tax on payments made to Indian clients in the absence of the inter-governmental agreement. The US had earlier given India time till September 30 for putting in place the framework.
US law mandates all its citizens, residents and non-resident citizens to report their foreign accounts at the end of the tax year as it follows a system of taxing the worldwide income of its people.
The agreement with India will help it to capture any unreported foreign assets.
India, which taxes the worldwide income of only its residents including resident foreign nationals, will also benefit from the deal. Non-residents are taxed only on the income sourced from India. To profile taxpayers and accurately assess the taxable income, an understanding of the assets is vital. Indians have to report foreign assets as part of the tax returns.
India’s recently introduced Black Money Undisclosed Foreign Income and Assets Imposition of Tax Act of 2015 prescribes up to 10 years of rigorous imprisonment besides tax and penalty amounting to 120% of the value of any unreported foreign asset or income. Even non-disclosure of foreign assets acquired using tax-paid funds would attract a Rs 10-lakh penalty under the Indian black money law. Under a three-month special compliance window expiring on September 30, those with unreported foreign wealth could make a declaration, pay 60% tax and penalty, and escape prosecution.
Under FATCA, insurance, banking, pension and stockbroking firms in India have to report their US client details to the I-T department for eventual sharing with the IRS. The US government’s idea is to capture details of its taxpayers’ unreported foreign financial accounts, stock, securities, mutual funds and insurance or annuity schemes with a cash value above $50,000.
“It is hoped the exchange of information on automatic basis regarding offshore accounts under FATCA would deter tax offenders, would enhance tax transparency and eventually bring higher equity into the direct tax regime which is needed for a healthy economy,” an official statement quoted Das as saying. The statement further said that the US IRS would provide similar information about Indian account holders in the US on automatic basis.
FATCA mandates all US citizens, residents and non-resident citizens to report their foreign accounts at the end of the tax year. Himanish Chaudhuri, partner, KPMG, said that while some operational challenges are expected in the near term, there are definite long-term benefits from this system of automatic and periodic exchange of taxpayer information.