Indian MFs gear up to comply with FATCA

Indian mutual fund industry is gearing up to comply with the Foreign Account Tax Compliance Act (FATCA), a move that will help in combating possible tax evasion by Americans through Indian financial entities.

Indians residing in the US may find it difficult to invest in products offered by the USD 9-trillion Indian mutual fund industry from July 1.

The implementation of the new tax evasion law is expected to increase legal and compliance costs for the Indian mutual fund houses.

Apart from mutual funds, broking, wealth management and portfolio management services sectors would also be impacted by the FATCA guidelines.

Currently, there are 44 players operating in the mutual fund industry.

India, last month, concluded an 'in substance' agreement with the US to combat possible tax evasion by Americans through Indian financial entities.

The FATCA requires the US government to sign Inter- governmental Agreement (IGA) with various countries, including India, where American individuals and companies may hold accounts and other assets.

While FATCA became a law way back in 2010, the final regulations were issued for it in January last year and it is set to come into effect from July 1 after signing of IGAs with different countries.

Once implemented, all financial institutions in India would need to carry out a detailed due diligence on all their clients and report details of their US clients to the US tax department (Internal Revenue Service).

The law aims to check and impose withholding tax on illicit activities of some wealthy individuals who use offshore accounts to evade millions of dollars in taxes.

A non-compliance with FATCA entails 30% withholding tax on certain US source payments.

Market regulator Sebi is expected to issue new guidelines for market intermediaries in this regard in the current fiscal, while Reserve Bank of India (RBI) also plans to follow the suit.