The agreement signed this week by the governments of India and the United States to implement the Foreign Account Tax Compliance Act (FATCA) is yet another weapon in India’s war against tax evasion and black money. It requires both governments to exchange financial information on offshore accounts of each other’s citizens in their respective territories. The agreement may not be of any great use to India in the immediate context — since the proportion of Indian tax-evaders hiding funds in the U.S. is negligible compared to those doing so in tax havens such as the Bahamas, Cayman Islands and Luxembourg — but signing it was still essential since the U.S. imposes strict punitive measures on companies that are not registered under FATCA. Basically, failure to sign it would have meant companies such as the State Bank of India and the ICICI bank would have become highly uncompetitive in the U.S. The U.S.’s motivation to get India to agree to FATCA is clear: the more signatories there are to it, fewer will be the number of places where tax-evaders can hide. There are 110 jurisdictions that have signed in, including several of the tax havens.
From India’s point of view, the agreement is a simple bilateral deal, but it must be looked at in the context of its concerted ongoing efforts to deal with black money. By means of legislation in India and multilateral agreements signed with other countries, India has been closing the net around tax-evaders as never before. The Black Money Act of 2015 makes failing to declare foreign assets or income a costly proposition: apart from the flat 30 per cent tax levied on foreign income, individuals who fail to declare it will have to pay a penalty three times the tax amount (which will work out to 90 per cent of the value of the income). They could also face a possible jail term. Internationally, India last month joined the Multilateral Competent Authority Agreement (MCAA) on the Automatic Exchange of Financial Account Information, which has 59 other members. This ensures multilateral sharing of financial information on an automatic and systematic basis, unlike in the previous system in which only information pertaining to specific individuals would be shared, that too when there was suspicion of wrong-doing. Taken together, the Black Money Act, the MCAA, and now the FATCA agreement comprise a formidable system aimed at curbing black money. Indeed, it is the most systematic and concerted effort made by India to date. This commendable and long-overdue initiative will send forth the message that the government is intent on doing what it had promised to do — to curb irregularities involving funds held in foreign lands, and black money.
