Signing of an inter-government agreement (IGA) between India and the US on the Foreign Account Tax Compliance Act (Fatca) might not be smooth, despite New Delhi getting a one-month extension for this, as the Securities and Exchange Board of India (Sebi) has raised some concerns over the US tax norms.
According to sources in the know of the matter, the market regulator has written to the finance ministry, saying Fatca in its current form lacks complete reciprocity from the US counterparts, and there is an asymmetry in due-diligence requirements.
"In a note to the Fatca council, Sebi has sought that the council iron out the issues, including the registration requirement, penal provisions and reciprocity from US counterparts," said a source.
In June this year, India had in substance reached an agreement on the terms of an IGA to implement Fatca; India is treated as having an IGA in effect from April 11, 2014. But the inter-government pact can be signed only after the Union Cabinet's approval. It was originally to be inked by the end of this year but the US has now extended the deadline for it to January 31 next year.
Sources close to the development say the signing has been delayed because of Indian financial institutions' unpreparedness.
Fatca was enacted by the US to detect and discourage tax evasion by persons living and earning in that country. Under this Act, the financial institutions in signatory countries have to report their American clients to the US' Internal Revenue Service (IRS) - failure to do so leads to a withholding tax liability of 30 per cent on the institutions concerned.
After reaching an in-principle agreement with the US, the Indian government set up a council, with representatives from the finance ministry and regulators as members, to frame rules on reporting under the Act.
According to policy-makers, the thinking within North Block is that there should be a Common Reporting Standard (CRS) acceptable to the G-20 nations, instead of rules for reporting of American clients alone.
Market participants believe the penal provision of 30 per cent liability for non-reporting is 'too-high'. "The 30 per cent withholding tax liability on assumption of non-compliance is not creditable under the Indian Tax Act. The Indian institutions will need to work on processes to be able to furnish information and comply with the regulations and avoid being penalised for unintentional lapses," said Rahul Garg, leader (direct tax), PricewaterhouseCoopers.
Other tax experts believe the extra-territorial aspect of Fatca remains a concern.
"The Indian tax laws do not have provisions to extract data or information on Indian income from other countries. The question of complete reciprocity from US counterparts does not arise, as the Indian tax laws do not tax non-residents even if the income generated is based out of India," said Sunil Shah, partner, Deloitte Haskin & Sells.
The Indian government is to sign the IGA under 'Model A', which will entail reporting by financial institutions to the US authorities through the Indian regulators and government.
Accounts under $50,000 in value will not be scrutinised. Large broking and mutual fund houses predominately tapping foreign investors are likely to be affected, as compliance norms for high-value accounts will be more stringent. Financial institutions might be required to assign relationship managers for these accounts and clients.
According to data on the Sebi website, the total investments by non-resident Indians through custodians this financial year stood at close to Rs 2,000 crore until November. More than 90 per cent of the accounts involved were higher than $50,000 in value.
The amount likely to come under scrutiny is close to Rs 130 crore under the mutual fund route.
FATCA FACES HURDLES
- Sebi has written to the finance ministry over lack of complete reciprocity from the US counterparts
- Regulator has raised market concerns on penal provisions and lack of symmetry in reporting standards
- Fatca council to draft common reporting standards for market intermediaries that are acceptable to G-20 nations
- As of Nov, NRIs had invested a total of Rs 2,000 cr through Indian custodians
- Rs 130 cr channelled through the mutual fund route could come under scrutiny