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As Fatca comes closer, 5 million folios risk closure

By Chandan Kishore Kant
July 21, 2016 14:34 IST
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Fatca was passed in 2010, as a crackdown on tax evasion through offshore investments by US residents.

One in every 10 mutual fund folios (accounts) in this country is yet to comply with the Foreign Account Tax Compliance Act, an American law but having a bearing on most global investors. Non-compliance occurs when any investor does not declare his tax residency.

Nearly five million MF accounts -- mostly of domestic individual investors -- face closure if they don’t by August 31 meet the obligations the government has agreed to enforce on Fatca.

About Rs 1.1 lakh crore (Rs 1.1 trillion) worth of assets are in these accounts.

Fatca was passed in 2010, as a crackdown on tax evasion through offshore investments by US residents.

That country then signed Inter Government Agreements with about 50 others, India included.

These make it mandatory for financial institutions (such as MFs and banks) in these countries to provide details of clients with a US connection.

Fatca aims to track all US residents with non-US accounts and US citizens, too.

They all have to give a mandatory disclosure on whether they have tax residency elsewhere and if so, the countries where they are tax payers.

The deadline for this is August 31 and failiure means closure of their accounts.

Investments before July 2014 are exempted from Fatca regulations.

MF executives said they'd stepped up the process to increase engagement with distributors and advisors to ensure full compliance.

Sector executives said there were around 7.5 million non-compliant investors till some months before.

"It has been brought down to five million, still a huge number," said one chief executive.

There are 48.92 million folios in the MF sector.

"It is just not practical to get confirmation from all investors.

"Many of them could be one-time investors into MFs," said an official.

Though the registrars and MF houses had even provided online facilities to investors for coming on board with Fatca, the steps have not yet yielded the desired results.

MF entities have already requested the Securities and Exchange Board of India to not freeze non-compliant accounts.

However, "little is in the hands of Sebi, as it's an agreement between two governments. We need to gear up for it and work on a war footing,” said an official.

What is Fatca?

Foreign Account Tax Compliance Act rules require financial institutions around the world to report holdings of "US persons" worth more than $50,000 to the Internal Revenue Service, or face crippling penalties.

Why these rules?

These regulations are presently being used to crack down on the offshore banking sector.

Anti-tax avoidance measures?

Yes. On 17 January 2013, the US issued final rules on new anti-tax avoidance measures called Fatca.

US eyes rich haul

US tax authorities expect the measures to raise around $7.6 billion in revenue for the IRS over 10 years.

Illustration by Dominic Xavier/

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Chandan Kishore Kant in Mumbai
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