India and the US today signed a tax information sharing agreement under a new US law, FATCA, that will enable automatic exchange of financial information between the two nations about tax evaders, from September 30.
The pact will cover automatic sharing of information on bank accounts as well as financial products like equities, mutual funds and insurance and is aimed at fighting the menace of black money stashed abroad.
Beginning September 30, banks, mutual funds, insurance, pension and stock-broking firms will report their Indian client details to the United States which will be shared with New Delhi.
Indian entities will do a reciprocal information sharing about Americans.
"We as a country see it as a great breakthrough and significant development in India-US cooperation in handling offshore tax evasion which also impacts money laundering and other aspects which we call in India the problem of black money," Revenue Secretary Shaktikanta Das said.
The agreement would "enhance tax transparency and accountability in matters of financial reporting and payment of taxes which are legitimately due to various governments," he added.
US has so far signed pacts with 110 tax jurisdictions to implement the Foreign Account Tax Compliance Act (FATCA).
The agreement was signed by Das and US Ambassador to India Richard Verma.
"FATCA is a mutual effort to combat tax evasion and it would be mutually beneficial for both the countries... FATCA would detect, discourage offshore tax evasion. This kind of exchange of information is top priority for governments", Verma said.
FATCA, along with the Automatic Exchange of Information (AEOI) agreement, which will come into play from 2017, "will ensure that all the tax related information, all the financial information are available with us from 2017," Das said.
The initiative, the US Ambassador said, marked a significant improvement in mutual cooperation to combat offshore tax evasion and will benefit both the countries.
"I am confident working together we can detect, deter and discourage offshore tax evasion, increase transparency and create stronger global financial system," Verma said.
The agreement, according to a Finance Ministry release, "underscores growing international co-operation to end tax evasion everywhere... The signing of Inter Governmental Agreement (IGA) is a re-affirmation of the shared commitment of India and US towards tax transparency and the fight against offshore tax evasion and avoidance."
Das said, "IGA with US to implement FATCA... is a very important step for the government to tackle offshore tax evasion. It reaffirms the government's commitment to fight the menace of black money.
"It is hoped that the exchange of information on automatic basis, regarding offshore accounts under FATCA would deter tax offenders, enhance tax transparency and eventually bring in higher equity into the direct tax regime which is necessary for a healthy economy."
FATCA, the release said, is rapidly becoming the global standard in the effort to curtail offshore tax evasion.
Commenting on the agreement, Himanish Chaudhuri, Partner – Governance, Risk and Compliance, KPMG, said, "There will be operational challenges in the near term, (but) there are definite long-term benefits from this system of automatic and periodic exchange of taxpayer information."
America had enacted FATCA in 2010 to obtain information on accounts held by US taxpayers in other countries. It requires US financial institutions to withhold a portion of payments made to foreign financial institutions (FFIs) who do not agree to identify and report information on US account holders.
Finance Ministry said that signing of the IGA with the US as well as India's decision to join the Multilateral Competent Authority Agreement (MCAA) on June 3, 2015 are two important milestones in the nation's fight against the menace of black money.
As a country, Das said, India sees the agreement "a great breakthrough and a significant development in India-US cooperation in handling offshore tax evasion which also impacts money laundering and other aspects which we call in India the problem of black money."
The exchange of financial information, he said, will help both the countries in preventing offshore tax evasion and deal with issues "like tax avoidance and tax arbitrage".
Das further said that recently the government has enacted a new law on black money to deal with menace of unaccounted funds stashed abroad by the residents.
Under the new Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, persons having unaccounted overseas assets are being given an opportunity to come clean by declaring their assets till September 30 and paying tax and penalty of 60 per cent.
Those who fail to declare their unaccounted overseas wealth during the voluntary compliance period will have to pay tax and penalty of 120 per cent and face jail term which could extend up to 10 years.
Under the FATCA agreement, FFIs in India will be required to report tax information about US account holders directly to the Indian government which will, in turn, relay that information to the IRS.
The IRS (Internal Revenue Service of the US) will provide similar information about Indian account holders in the United States. This automatic exchange of information is scheduled to begin from September 30, 2015.