FATCA: Yet another weapon in India’s war against Tax Evasions and Black Money

By Shruti Sharma, Campus Law Centre, Delhi University.

The Foreign Accounts Tax Compliance Act, better known as FATCA, is an Act which was enacted in the year 2010 by the United States Congress; it can also be called as American Global Tax law. FATCA basically requires Foreign Financial Institutions (FFIs) to report to the Internal Revenue System (IRS), information about financial entities in which U.S taxpayers hold a substantial ownership interest. It was basically introduced to target non compliance by U.S taxpayers using foreign accounts.

FATCA is intended to deter the evasion of U.S tax by United States personnel who hide money outside the U.S. Its basic objective is to create greater amount of transparency by strengthening information reporting and compliance by effecting rules revolving around the process of documentary, reporting and withholding on a taxpayer? The most interesting aspect of this Act is that it was originally enacted in the United States but its growing impact is felt around the whole world, i.e., it has been accepted at a global scale.

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FATCA is used to locate U.S citizens (including resident and non resident) and “U.S persons for tax purpose” and to collect and store information including total asset value and social security number. This law helps in detecting assets rather than income. Financial Institutes report this information to the U.S Internal Revenue System (IRS). Under FATCA, non U.S (Foreign) Financial Institutions (FFIs) are required to report assets and identify information related to suspected U.S. persons using their Financial Institutions. Presently, more than 100 Nations, including super powers like Russia and China are parties to the agreement of FATCA. FATCA’s 30% of tax and exclusions from U.S. markets are so catastrophic that everyone has opted to comply with it. Not only that, FATCA is making banking transparent at a worldwide level, with Swiss bank deals prosecutions and strong presence of FATCA, the IRS has a quicker, better and a complete information system. However, it is pertinent to note that a strong law like FATCA grew out of a controversial rule; America taxes its citizens and even permanent residents “on their worldwide income”. Recently, Canadians filed a suit to block FATCA to prohibit and handover U.S. names to IRS. This suit claims that the inter government Agreement, under which Canada can turn over private bank account information, is illegal. Also, the legal claim challenges the constitutionality of the Agreement that the Canadian government struck with U.S.

The U.S. Department of Treasury released several models of the Intergovernmental Agreements (IGAs) to facilitate FATCA. Compliance in centre comes under the “MODEL I” IGA Approach, countries which are based on FFI are exempted from signing the above stated IGA agreement, as such countries can directly approach to IRS. Countries which are part of “MODEL I” IGA Approach have exclusive rights to promulgate their own rules, generally FFIs are required to report to the local authority, who in return agree to share relevant revenue information with the IRS. When it come to “MODEL II” IGA Approach where a country’s FFIs forms an agreement with the IRS, the said country is given some sort of relief where that country is exempted from compiling with certain FATCA obligations, an appropriate example of such obligation will be “the obligation to close the accounts of recalcitrant account holder” FATCA is a key component of the Federal Government’s push for heightened tax compliance among United States taxpayers with foreign countries. Enacted in the year 2010, FATCA became effective on 1st January, 2013 and withholding took effect for individuals on 1st July, 2014. FATCA’s withholding for non-compliance and broken-dealers in non IGA jurisdiction will start from January 2015.

Now when it comes to the implementation of the much hyped United States originated FATCA law, in the world’s largest democracy, i.e., India, recently an Agreement has been signed between the Government of India and the Government of United States to bring FATCA law in our country. The basic provision for this agreement is that it requires both the Government of India and the Government of United States to exchange financial information on offshore accounts of each other’s citizens in their respective territories. The prime motivation that attracted United States to get India as one of its signatory to FATCA is simple- “The more signatories to FATCA, the fewer will be the number of places around the world where tax evaders can hide”. As for India the FATCA Agreement is a simple bilateral deal which will eventually help India in dealing with the messy and inflated issue of Black Money. Taking account of the 30% tax levied on foreign income clause of FATCA, the individuals who fail to disclose their income will have to pay a penalty three times the tax amount, which will be approximately 90% of the value of their income. In addition to it, there is also a provision of serving jail term in case of non compliance with the provisions of the Act. FATCA Agreement between India and United States can be treated as a concerted effort which is aimed at extinction of the problem of black money from India.

After constituting a special investigative team to recover “black money” or undeclared income from abroad in the past, ensuring FATCA’s full implementation will inevitably be among Prime Minister Mr.Narendra Modi’s administration’s top priorities this year. India’s agreement in substance, for FATCA, with U.S., was completed under terms of “Model I” IGA, which includes reciprocity, according to which, India’s Financial Institutions will be required to report on the accounts of U.S. citizens to the country’s Central Board of Direct Taxes. The CBDT will then forward this information to IRS. Indian government officers opted for this “Model I” agreement over the “Model II” agreement, given the executive due diligence requirements for Financial Institutions under the latter.

As every coin has two sides, similarly the FATCA Agreement also has its positives and negatives. Implementation of FATCA in India raises an important issue regarding the compliance burden and cost that this Agreement will be eventually imposed on our Indian Financial Institutions. The higher compliance cost will presumably be passed on to the domestic clients as well, unless these Financial Institutions choose to forgo business from U.S. In addition to this, there are many other legitimate concerns such as privacy, data protection and transparency, etc. which are still untouched. In view of this Agreement, i.e., introduction of FATCA law in India, our Revenue Secretary, Mr. Shaktikanta Das stated. “so it is going to be very difficult for anyone who has offshore assets or banking investments, which are undisclosed, to escape the arm of law; the compliance window is an opportunity which one would expect everyone to avail of”. It can be said that the Indian Era of strict and heavy tax laws have begun. Many Indian Financial Institutions have already registered themselves under the IRS FATCA registration portal, also the Indian legislature has amended the provisions of Sec 285BA of the Annual Information Return Act, which states that it is a mandatory obligation upon the Indian Financial Institutions to report prescribed tax information of the reportable accounts. such actions in our Indian scenario clearly proves that FATCA has already left its unbeaten mark on the India’s FFIs and it is here to stay for a long period of time.

FATCA can be considered as a double edged weapon for Indian people, as it can be considered as a terrible move for Indians living in the United States who are looking forward to making an investment in India. The reason behind it is that the return on their investment in India is most probably likely to be taxed in India as well as in the United States. Therefore, it is not appropriate to say that bringing FATCA in India is a win-win situation for everyone. However it cannot be ignored that bringing FATCA laws in India will certainly act as a helping hand in fighting with the evergreen problem of black money in our country, establishing that influx of FATCA Act in India is an affirmative sign towards the development of our nation.

“Black Money is so much a part of our white economy, a tumour in the centre of the brain-Try to remove it and you will end up killing the innocent patient”.

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