You are here: Home » Current Affairs » Specials » Black Money
Business Standard

Black money disclosures may prove costly for banks

Financial institutions at the risk of US sanctions as sharing of documents on SC directive amounts to violation of existing agreements

Vrishti Beniwal  |  New Delhi 

black money
Image via Shutterstock

Indian financial institutions face the risk of sanctions by the US, under the Foreign Account Tax Compliance Act (Fatca) - the new anti-tax evasion law in the US, - if the Supreme Court directs the Centre to disclose information about foreign accountholders even without the launch of prosecution into these.

This will be a breach of existing treaties; India might not be able to commit to confidentiality in new tax pacts with other countries.

As India is racing against time to sign Fatca by December 31, the apex court's May 1 judgment, directing the government to share documents in eight cases in which investigation hadn't found evidence of tax evasion, has put the finance ministry in a bind.

On October 16, it filed an application, seeking clarity on whether the court's order would forbid the government from entering into any treaty with a clause on maintaining confidentiality of information received. The clarification is essential for India to commit to its current and prospective treaty partners that the information received will be used only for tax purposes and can be disclosed in public court proceedings only after prosecution for tax evasion is filed.

If the apex court clarifies it has barred the government from doing so, India won't be able to sign the Fatca, as well as other tax treaties under international standards.

"For Fatca and many international tax treaties, we need the approval of the court. If it doesn't allow maintaining the confidentiality, we can't share information under these agreements and Indian banks will face the consequences," a finance ministry official said on condition of anonymity.

Under Fatca, all foreign financial institutions have to share information on American taxpayers. If India fails to sign the Fatca, Indian financial institutions will become non-compliant, subjecting these to "a regressive" 30 per cent withholding tax and exclusion from US markets.

"The requirement to sign the Fatca is fairly stringent and non-negotiable. Most countries have signed it. Indian financial institutions operating in the US might suffer a backlash because they are required to comply with the US law," said Vidya Rajarao, partner (forensic services), Grant Thornton India LLP.

On Monday, the government told the apex court non-sharing of information would hamper India's efforts to secure details of tax evaders with illegal accounts abroad. The new global standards on automatic exchange of information, which can help tackle the issue of black money, have the same confidentiality requirements.

While India has, for years, been struggling to get information from tax havens about its residents who stashed abroad, as many as 50 countries, including Switzerland, Cayman Islands, Luxembourg and Mauritius, have agreed to give information about US tax evaders. The US will also reciprocate by sharing information about taxpayers of these countries.

According to officials, if India doesn't sign the Fatca, no US company will find it attractive to invest in India due to withholding tax. On April 11, the US Treasury had said it had reached an agreement "in substance" with India on the Fatca. However, it was only a draft agreement between senior officials of the two sides and will have to be approved by the Indian Cabinet.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Tue, October 28 2014. 00:40 IST