Guide On FATCA and CRS — Explained

This document covers

1. Background
2. What is FATCA?
3. What is CRS?
4. India's Implementation of FATCA and CRS
5. Purpose of Implementation of FATCA and CRS
6. Information received by India under FATCA and CRS
7. Forms required to be filed by an individual in USA
8. Forms required to be filed by an individual in India
9. Requirement of Disclosure under Indian tax laws
10. Failure to disclose Foreign Income and Foreign Assets

1. Background

Starting from 2024, the Income Tax Department of India is sending emails to the taxpayers who has not reported foreign assets and foreign income in their Income tax returns.

The Income Tax Department is in receipt of information from the foreign countries like USA and warning the taxpayers to disclose the same.

FATCA is a mechanism with which India shares financial accounts held by US taxpayers in India. CRS is a framework that India receives similar information related to Indian residents.

2. What is FATCA?

• FATCA means Foreign Account Tax Compliance Act
• It is initially introduced by United States of America and it requires foreign financial institutions or foreign entities to report information about financial accounts held by US Taxpayers.

3. What is CRS?

• CRS means Common Reporting Standards.
• It is developed by the OECD (Organisation for Economic Co-operation and Development) which is a global initiative for the automatic exchange of financial account information between participating countries.
• Under CRS, the financial institutions are required to report information about financial accounts held by foreign residents to their respective tax jurisdictions. This information will be exchanged with other jurisdictions annually.

4. India's Implementation of FATCA and CRS

• India has incorporated FATCA and CRS in Income tax act 1961 through amendments introduced by Finance Act 2014
• Financial Institutions in India are required to comply with FATCA and CRS reporting requirements to ensure tax transparency and prevent evasion of taxes.

5. Purpose of Implementation of FATCA and CRS

The purpose of implementation of FATCA and CRS is as follows:

• Combat Offshore Tax evasion
• Enhance transparency of taxes
• Improve Revenue Collection
• Strengthen Global Cooperation
• Support Domestic Tax Reforms
• Promote Financial Integrity
• Reduce Compliance Gaps

6. Information received by India under FATCA and CRS

• Under FATCA, India shares information about financial accounts held by US Taxpayers in India. Similarly India receives information about accounts held by Indian residents in USA
• Under CRS, India receives information about accounts held by Indian residents from over 100 countries
• The following information is received by India under FATCA and CRS
  • Account holder's name, address, and tax identification number (TIN)
  • Account number and balance
  • Income details such as interest, dividends, and other financial proceeds.

Through above information, Income tax department will know the global income of Indian resident taxpayers and it helps in identifying the taxpayers who has not disclosed foreign income and foreign assets.

7. Forms required to be filed by an individual in USA

• A US Person including a citizen or resident of USA should file Form FBAR (Foreign Bank and Financial Accounts)( FinCEN Form 114)
• The above persons are required to report a financial interest in or signature or other authority over at least one financial account located outside the United States if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
• The due date to file Annual report in FBAR is April 15 following the calendar year reported ( 6-month automatic extension to Oct 15)
• The following details needs to be reported in FBAR by the taxpayers
  
  • Name on the account
  • Account number
  • Name and address of the foreign bank
  • Type of account, and
  • Maximum value during the year
• The following details are not required to be reported in FBAR
  
  • Financial account held at a U.S. branch of a foreign financial institution
  • Foreign stock or securities not held in a financial account
  • Foreign partnership interests
  • Domestic mutual fund investing in foreign stocks and securities
  • Foreign hedge funds and foreign private equity funds
  • Foreign real estate held directly
  • Foreign real estate held through a foreign entity
  • Foreign currency held directly
  • Precious Metals held directly
  • Personal property, held directly, such as art, antiques, jewellery, cars and other collectibles
  • 'Social Security' - type program benefits provided by a foreign government

8. Forms required to be filed by an individual in India

• A Resident of India is required to file foreign assets in ITR 2/ ITR 3 in Schedule Foreign Assets
• There is no other form required to be filed along with ITR for separate disclosure

9. Requirement of Disclosure under Indian tax laws

• Income tax Act 1961 deals with the requirement of disclosure of Foreign Income and Foreign Assets
• Schedule FSI is meant for reporting of Foreign Sources of Income. Also the taxpayers can claim Tax Relief (TR) for the taxes paid outside India.
• Schedule FA is meant for reporting for disclosure of Foreign Assets.

10. Failure to disclose Foreign Income and Foreign Assets

Failure to disclose foreign income and foreign assets leads to huge penalties and prosecution under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015

1. Penalty for non-disclosure: If the taxpayer fails to disclose foreign income or foreign assets, then the taxpayer is required to pay a penalty equivalent to 300% of the tax due on the undisclosed foreign income or assets.

This reflects the Government’s zero tolerance policy towards tax evasion

2. Penalty for filing Incorrect information: If the taxpayer fills the inaccurate information regarding foreign assets, a penalty of Rs 10 lakhs will be levied even in the absence of tax evasion.