By crushing the expectations of 95% plus NRIs, India signed Foreign Account Tax Compliance Act (FATCA) agreement with USA ‘in substance’ under the terms of Model 1 IGA. By this India has joined the list of 25 countries that signed the FATCA agreement with the USA.
FATCA was enacted by the USA in 2010 aiming to combat Tax evasion by US nationals, holding investments in foreign accounts. Thus, it is mainly concerned with the reporting of Foreign Financial Assets (FFA) to Internal Revenue Service (IRS). This reporting mechanism is of two tiers which entail US Nationals to declare their foreign financial assets and income in form 8938 to IRS and on the other hand foreign financial institutions to report certain information to IRS.
FATCA can be implemented under the two models. Say in India, under model 1 Financial Institutions are required to report on the account of US citizens to Central Board Of Direct Taxes (CBDT) and then CBDT will forward the information to IRS whereas under model 2 Financial Institutions are required to send client tax information directly to IRS.
Though FATCA is here to stay, implementation of the agreement is a stringent task as financial institutions are still not clear about the guidelines, when and how information is to be provided, further ambiguity in respect of international legislations and concerns over local privacy laws are the biggest obstacles. But SEBI and RBI are expected to issue some guidelines for the sake of clarity and RBI is also expected to issue resources for financial institutions.
However, this agreement is surely beneficial for USA but it will put an excessive burden on financial institutions of India and escalation of costs is quite obvious with the kind of technology used in Indian Banking System. On the other hand, there are noticeable implications for Indian Expats who live in the U.S. but still have deposits back home. The news source said that many of those expats will likely empty their accounts to avoid fees. These funds are expected to either be invested in other offshore accounts or in the U.S.