We all come across issues and ideas related to the world of finance that sound Greek and Latin. Worry not. We are here to guide you through the maze FATCA will soon become Mandatory
FATCA has been the talk of the country for the past couple of months. Most of the Indian investors would have heard this term but not sure about the regulations surrounding it. If you are among them, here’s the lowdown on FATCA.
What is it?
India and US have signed an inter-governmental agreement in order to implement the concept of Foreign Account Tax Compliance Act or FATCA which is expected to be a great move towards transparent taxation between these two countries. The government of US has been looking to bring about significant changes in the taxation rules with respect to its own citizens as well as foreign citizens. It has also recognized that Non Resident Indian (NRI) are an important part in this regard. FATCA is a crucial step in terms of sharing of key information between the two countries such as domestic income, foreign investments/assets of individuals.
What is the motive behind this?
The major intention behind the concept and implementation of FATCA is to address the issue of ever rising black money. It is known already that India has been working on the reduction of black money in the system. However, the major reason behind signing this agreement is the concern expressed by US with regards to the huge money repatriated to India by the NRIs or the unprecedented amount received by NRIs from their families back in India on account of various reasons such as education or supporting funds. The flow of funds is both ways.
This will also help the Indian Government gather information on the funds sent out and later coming back to India as black money. Such transactions are popularly known as Hawala transactions or round tripping. Government of India could effectively use such information to minimize these transactions. The onus of collecting financial information of investors will be on the financial institutions, which will be passing on this key information to the tax authority. Institutions which deal with investors such as banks, mutual funds, intermediaries will be taking up this responsibility. RBI will be drafting the compliance for Banks and NBFCs. SEBI will regulate this asset management companies for mutual funds and IRDA will do the same for insurance companies.
What if you do not submit the required details?
Basic information such as being Resident of US and foreign income and assets are required as part of FATCA. If you are a specified US person with foreign financial assets greater than $50,000, it becomes mandatory to report income through form 8938. Failure to report it can attract penalty of $10,000 - $50,000. Moreover, the qualifying Indian institutions can withhold up to 30% of the payments for those who do not comply with these regulations. Hence, especially, NRIs are advised to disclose any financial or non-financial assets held within and outside US to avoid penalties and prosecution.
Are there any other implications?
Though implementation of FATCA is good news for economies of both the countries, it is a bad news for a lot of citizens who were using the current regulations to save tax on properties and huge amount of cash and other assets held by them. There have been millions of Indian citizens who took up US citizenship for ease and convenience or just to save tax. For the latter category, this could be a googly as a result of which many are even looking at giving up their US citizenship and considering Indian citizenship. It’s as simple as this – get ready to pay tax or renounce US citizenship.
If implemented diligently, this could be a major step forward towards curbing the menace of black and unaccounted money from the system.