India set to sign tax compliance Act with US by 31 December

The move will be a major reprieve for Indian financial institutions dealing with US taxpayers

New Delhi: India should be able to sign the Foreign Account Tax Compliance Act (Fatca) with the US by 31 December, said a senior government official. The move will be a major reprieve for Indian financial institutions dealing with US taxpayers and end weeks of uncertainty. The Indian government had approached the Supreme Court to get clarity on the confidentiality clause before signing the Fatca, after it was forced by the court to disclose names of Indian account holders in foreign banks obtained from a foreign government in the black money case. The Fatca is a US law that requires foreign financial institutions to make disclosures about American taxpayers to US authorities, but contains confidentiality clauses to protect this mandatory exchange of information. The Supreme Court had authorized the Special Investigation Team (SIT), a body the court had constituted to bring back black money, to take a decision. The SIT has not raised any objection, paving the way for India to sign the Fatca with the US, said a senior government official, who did not want to be identified. “We are working towards signing the inter-government agreement by 31 December,” the official said. To be sure, the finance ministry will seek the cabinet’s nod before going ahead and signing the Fatca. India’s ability to strictly adhere to confidentiality clauses was crucial for it to meet the 31 December deadline for signing the Fatca as it would facilitate automatic exchange of information. Under the law, foreign financial institutions can enter into agreement with the US Internal Revenue Service individually or alternatively, foreign governments can sign agreements with the US government. If India does not sign the Fatca within the stipulated time period, all Indian financial institutions dealing with US taxpayers would be subject to a 30% withholding tax. That is, any payment made by a US taxpayer to foreign financial institutions in non-compliant countries will be subject to the withholding tax. In addition, the 30% withholding tax can also be imposed by other Fatca-compliant countries against non-compliant countries. Last month, in a post on Facebook, finance minister Arun Jaitley had said that there will be disastrous consequences for the Indian economy if India is not able to sign the Fatca. “It will negate the efforts being undertaken by our government to revive the Indian economy. The Reserve Bank of India has already informed the government of India about the serious and adverse consequences of non-compliance of Fatca by India,” he had said. India’s ability to uphold confidentiality of information received under various tax treaties with foreign governments had come under scrutiny after the Supreme Court ordered it to disclose names of 627 account holders from the so-called HSBC list it received from the French government. The Supreme Court’s insistence on disclosing names, even in cases where prosecution has not been initiated, has threatened to stem the flow of such information received by India from foreign countries under exchange of information clauses under various tax treaties. Sunil Jain, a partner at law firm J Sagar Associates, said the signing of the agreement between both the countries will be a critical milestone. “India may also need to consider a similar programme of its own soon so that it can collect information about its taxpayers from other countries,” he said.