Indo-US Tax Information Exchange Agreement

What is FATCA?

FATCA is Foreign Account Tax Compliance Act, a law enacted in the United States in 2010. The law aims at combating tax evaders who stash funds in off-shore accounts. The main goal of the FATCA is to source information about US citizens who invest in emerging markets such as India (in financial instruments such as equity and insurance or stash money in bank accounts) to avoid taxes back home. Earlier this month, India and the United States signed a pact that allows for the implementation of this US law. This intergovernmental agreement operates over 110 tax jurisdictions and a number of others are under negotiation. The pact allows for India and the US to share information about these tax evaders.

How will it help apprehend Indian tax evaders?

The FATCA shall facilitate the flow of financial information between both nations. This means that the tax pact with the US not only involves sharing names of US nationals who have evaded tax by investing in India but also involved obtaining names of Indian tax evaders with stashes in American financial institutions. This also means that those who have been avoiding the tax dragnet by siphoning off funds into financial assets abroad are at a real risk. More taxable income and assets are now likely to be declared, increasing the government’s revenue.

The agreement facilitating the implementation of the FATCA was signed by India’s Revenue Secretary Shaktikanta Das and by the US Ambassador to India Richard Verma. Verma said, “FATCA is a mutual effort to combat tax evasion and it would be mutually beneficial for both the countries… FATCA would detect, discourage offshore tax evasion. This kind of exchange of information is top priority for governments”. The agreement is crucial in the implementation of the new black money law.

Why is this agreement important?

The FATCA comes at a time when the Indian government is making a drastic effort to draw the dragnet around tax evaders. On July 1, the NDA government black money law came into effect. The law allows for stringent penalties and imprisonment for failure to disclose overseas income and assets. Last year, the NDA government’s unsuccessful attempt to obtain the list of tax evaders from Swiss banks caused much loss of face. Bringing tax evaders to task was also one of the key election promises of the NDA. The government hopes to make up for the loss with this treaty and with the cooperation of US officials.

One of the greatest advantages of the agreement is that it saves Indian financial institutions the need to ink individual agreements with the US government. It also shields these Indian institutions from facing penal taxes back in the United States due to non-disclosure of financial dealings involving American nationals.

How will the pact work?

Under the terms of the accord signed by the two governments, all the financial institutions of India will now be required to reveal information about all financial dealings undertaken by US tax payers to the revenue department. This information will then be passed on to the Internal Revenue Service (IRS), US tax authorities. The IRS will similarly pass on details of Indian nationals transacting with American financial institutions in the US. This exchange shall be regular and is likely to commence on 30 September, 2015.

According to the terms of the FATCA, all financial institutions dealing with American nationals will be required to report directly to the IRS the details of all accounts held by US taxpayers. This also includes revealing the financial details of entities in which American taxpayers hold any ownership stake. The financial institutions that do not report to the IRS will need to face a 30 percent withholding tax on payments from all US nationals/firms they deal with. Indian financial institutions shall be exempt from having to report directly to the IRS due to the presence of this agreement.

India’s tax information sharing agreements

The US is not the only country with which India has signed tax information exchange pacts. Last year in November, India signed an information exchange deal with a country in the Caribbean used as a fun offshoring haven by tax evaders – Saint Kitts and Nevis. These tax havens are often small countries that have very low tax rates and investor confidentiality is maintained in most of these places. Despite India’s focus on the funds stashed away in Swiss banks, most economists believe that tax evaders use these tax havens to get out of paying their dues. India has other tax information sharing agreements in place with tax havens such as the British Virgin Islands, the Isle of Man, Bahamas, Bermuda, the Cayman Islands, Liechtenstein, Gibraltar, Macau, Jersey, Liberia, Argentina, and Monaco.

In June this year, India also joined 59 other countries in signing the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information. This accord allows signatory nations to periodically swap information on a range of financial matters. This is also likely to aid in apprehending tax evaders. In India all cases of tax evasion and black money, especially those related to money stashed abroad, are being looked into by a Special Investigation Team (SIT).

The road ahead

Last year, Indian Prime Minister Narendra Modi and other leaders from the Group of 20 countries met in Australia and inked an agreement for these G20 nations to exchange tax information automatically and periodically. The agreement is to come into effect by the end of 2018. With India becoming very stringent about tax dodging, the new black money laws are likely to act as strong deterrents in matters of evasion. If India has learnt one lesson from its inability to bring home the details of Indian nationals with Swiss accounts, it is that tax information swapping with other governments is the only way forward. India will, however, also need to scrutinise its own ability to uphold the confidentiality of information thus received from foreign governments.

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