Indian and U.S. flags in New Delhi (file photo: Reuters)
India and the United States signed a tax information sharing agreement last week that will make it more difficult for Indians and Americans to dodge tax by stashing it abroad.
The agreement aims to close a window for U.S. citizens to avoid tax through financial products like equities, bank accounts and insurance.
In return, Washington will support New Delhi in bringing back black money stashed by Indians in foreign tax havens. This will also boost Indian tax revenues as tax authorities will get information about Indians working in the U.S.
The agreement "would enhance tax transparency and eventually bring in higher equity into the direct tax regime which are necessary for a healthy economy," Revenue Secretary Shaktikanta Das said at the signing last Thursday.
Following Prime Minister Narendra Modi’s election promise to bring back black money stashed overseas, Parliament has enacted a law that will impose tough penalties and jail terms on tax evaders who fail to declare their overseas assets and accounts.
Last year, Modi joined leaders from the G20 countries in Australia in an agreement for countries to automatically exchange tax information on a reciprocal basis by the end of 2018.
Under the pact, banks, mutual funds, insurance, pension and stock-broking firms will report their American client details to the tax department for sharing with the U.S., said an Indian finance ministry official.
According to Reuters, investors will have to provide correct information about their tax residency and financial assets that would be shared with the U.S. tax authorities.
Washington has signed pacts with 110 tax jurisdictions to implement its new law, the Foreign Account Tax Compliance Act (FATCA), requiring financial institutions to share information about Americans' accounts worth more than $50,000.
According to the Financial Express, the Indo-U.S. deal removes fears of American financial institutions imposing a FATCA-mandated 30 per cent withholding tax on payments made to Indian clients in the absence of an inter-governmental agreement. The U.S. had earlier given India time till September 30 for putting in place the framework.
Tax experts told the Times of India that the agreement may result in more burden on financial entities and may result in some modifications to the KYC (Know Your Customer) requirements.
"FATCA creates a new compliance burden on the Indian financial institutions. With FATCA and common reporting standards (under OECD pact), they will be required to be geared up to exchange tax information of more than 60 countries. This calls for changes to customer on-boarding documents, systems, processes and reporting compliances," said Bahroze Kamdin, partner at consulting firm Deloitte Haskins & Sells.