Finance Budget (No.2) proposed many important changes related to NRI investments and taxation. One of the very important changes that has gone unnoticed by tax experts is that India is preparing to comply with FATCA (Foreign Account Tax Compliance Act ) of USA. While India has not yet signed the US-India FATCA agreement yet, India has agreed in principal for the same and has also initiated steps to comply with the proposed US-India FATCA regulations.
Currently, income tax department tracks and collects certain financial information through Annual Information Return (AIR). The AIR section is proposed to be replaced by Statement of Financial Transactions and Reportable Accounts (SoFTRA).
Let’s understand the current information tracking and proposed changes by the income tax department.
The existing AIR provisions require reporting of following financial transactions to the income-tax department:
- Cash deposits in a savings account in a year or Rs. 10,00,000 or more
- Credit Card bill payment in a year of Rs. 200,000 or more
- Mutual fund investment in a scheme of Rs. 200,000 or more
- Investment in bond or debentures of Rs. 500,000 or more
- Investment in equity shares of Rs. 100,000 or more
- Purchase or sale of an immovable property of Rs. 30,00,000 or more
The AIR requirement has helped the income tax department to inquire and follow up with the persons who have not reported the income and/or pay the tax as a result. Now, with a view to facilitate effective exchange of information in respect of residents and non-residents, the India Budget 2014 (No. 2) proposed to amend and expand the said requirements.
The revised SoFTRA provisions, in addition to the existing / old requirements, would require furnishing of statement by a prescribed reporting financial institution (FFI under FATCA) in respect of a specified financial transaction or reportable account (NRI who are US residents, having financial accounts with more than threshold amount) to the income-tax department. It is further proposed that the statement of information shall be furnished within such time, in the form and manner as may be prescribed (as required by and to comply with FATCA provisions).
The budget also proposes that the Central Government may specify,
(a) the persons to be registered with the prescribed income-tax authority;
(b) the nature of information and the manner in which such information shall be maintained; and
(c) the due diligence to be carried out for the purpose of identification of any reportable account. (To comply with the due-diligence requirement of identifying accounts with US idicia as required in FATCA).
The penalty provisions are also introduced for failure to furnish statement of information or reportable account, failure to correct any inaccuracy, failure to comply with the due diligence requirement, or for providing inaccurate information the person.
With the proposed change in the budget, India has taken concrete steps for FATCA compliance. The framework is now getting in place and the information will be gathered through SoFTRA by the Income Tax department and will be reported to the IRS. This has brought clarity and answered anyone who questioned the practicality or probability of India’s readiness about FATCA compliance with complex reporting system and/or different types of banks, financial accounts, financial intermediaries, etc.
If you still have any doubt or have any question or need any guidance for compliance, please post your comments and let us know.