In order to help the US to tackle tax evasion, India has signed an 'in substance' agreement with the US under Foreign Account Tax Compliance Act (FATCA) to combat possible tax evasion by Americans through Indian financial entities. As per the agreement, India will provide US with the available information from Indian financial institutions on offshore accounts or assets of Americans or their entities. However, the US will give information on foreign accounts of Indian individuals, but not entities. The FATCA act is aimed to check and impose withholding tax on illicit activities of some wealthy individuals who use offshore accounts to avoid millions of dollars in taxes.
India has agreed to Model 1-Inter governmental Agreement (IGA) under FATCA under which financial entities will be required to report information on US account holders to the US internal revenue service (IRS) through CBDT. According to FATCA act, the US government to sign IGAs with various countries where American individuals and companies may hold accounts and other assets. The noncompliance with FATCA requires the investor to pay 30 percent withholding tax on certain US source payments. The US Treasury introduced two formats of the IGA - Model 1 and Model 2. As per the Model 2, financial institutions are required to report information directly to the US IRS rather than their local jurisdictions.
Indian regulators like SEBI and RBI are likely to issue guidelines soon for market intermediaries to ensure compliance of FATCA. After signing of IGA with the US, these regulatory measures would immensely help Indian financial institutions to cope up with this complex regulation. The FATCA is scheduled to come into effect from July 1, 2014.