Sebi's Draft Fatca norms: Greater scrutiny ahead for high-value US a/cs

The Securities and Exchange Board of India (Sebi) may soon come out with a framework to help regulated entities identify US accounts in India so that they can comply with the new anti-tax evasion law in the US.

Under the law, the Foreign Account Tax Compliance Act (Fatca), the US could seek information available with financial institutions of other countries on offshore accounts of US citizens and entities. India has agreed to provide such information under Fatca, to be implemented from July 1.

Sources said Sebi planned to put in place a value-base system through which individual accounts with holdings of more than $1 million (Rs 6 crore) would come under greater scrutiny; those with balances less than $50,000 (Rs 30 lakh) will be exempt from reporting. Domestic financial institutions that handle foreign money might be required to carry out thorough searches of high-value individual accounts to identify the nationality or residence of clients.

Sebi’s move was likely to impact large broking and mutual fund houses, which predominately tapped foreign investors, sources said. The capital markets regulator might direct financial institutions to segregate existing individual accounts into three categories — with balances up to $50,000; between $50,000 and $1 million; and those exceeding $1 million, they added.

As compliance norms for high-value accounts will be more stringent, financial institutions might be required to assign relationship managers for these, said market players.

Also, Sebi might ask intermediaries to complete the review of identifying high-value investors before December. These entities might have to report to Sebi on an annual basis. The review of lower-value accounts could be extended to next year.

Sebi, in consultation with the finance ministry, has decided to exempt certain institutions from compliance. Accounts of government entities and central banks, along with retirement funds, are likely to be exempted from Fatca compliance. Products such as those related to retirement might also be exempted.

Financial institutions that don’t comply with Fatca might have to pay a 30 per cent withholding tax on payments from US sources. For instance, a non-complaint domestic financial institution doing business with entities in the US might have to pay a penalty of 30 per cent withholding tax on all payments it has to receive from US entities.

What is Fatca?

• An anti-tax evasion law in the US, which will come into effect from July 1
• Under this the US can ask other countries to provide information on Americans liable for tax in the US
• India signed ‘in-substance’ agreement with US under Fatca
• It would require domestic financial institutions report to US authorities on investments by US entities