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Indian's tax in US have to disclose offshore accounts
March, 04th 2009

For Indian tax authorities, who have so far not mustered courage to ask taxpayers to disclose their bank accounts abroad despite speculation over Indians having huge deposits in Swiss banks, heres something to take a cue from.

The tax authority in the US has now made disclosure of offshore accounts mandatory even for non-resident individuals or corporates who have significant business in the country. This has ramifications for Indians working or having business interest in the US and also the subsidiaries of Indian companies registered there.

Apart from bringing individual wealth into the open, the amendment would also increase the compliance costs of non-residents and companies working out of the US.

This amendment is likely to cover a large population of Indian IT and other professionals working in the US, who will have to file details of their bank accounts henceforth or face penalty. Indian companies doing business in the US would also need to be aware of and comply with this regulation, said partner in Ernst & Young Amitabh Singh. Indians going on work visas like L-1 or H1B and short-term business travellers to the US would be required to declare their bank accounts in India.

The Internal Revenue Service, the agency responsible for collection and administration of taxes in the US, has recently expanded the scope of a provision that makes it mandatory for residents to disclose their offshore accounts. The expanded regulation requires certain non-residents to declare their financial account in a foreign country if the aggregate value of these accounts exceeds $10,000 (about Rs 5,00,000) at any time during the calendar year.

However, artists, athletes, and entertainers, who are not citizens or residents of the US and occasionally visit the country to participate in exhibits, sporting events, or performances, are exempted from making this disclosure.

Hitherto, the provision called report of foreign bank and financial account (FBAR), first introduced in October 2008, applied only to US citizens and green card holders. The measure is a part of the US governments efforts to combat offshore tax evasion, but could increase cost of compliance for these entities, as the FBAR has to be filed separately and not with tax return.

A financial account would include securities, securities derivatives, savings, demand, and checking deposit, an account identical to current account in India, used to securely and quickly providing frequent access to funds on demand but account balances in which do not fetch interest, or any other account maintained with a financial institution. Individual bonds, notes or stock certificates held by the filer are not covered under financial account.

Failure to file an FBAR, can be onerous and result in civil penalties, criminal penalties, or both. The civil penalty amount could be as high as $1,00,000 per violation while criminal violation can result in a fine of up to $ 2,50,000 or five years in prison, or both.

Countries across the world place various disclosure requirements on their citizens and other residents with a view to combating tax evasion.
Individuals who live in the UK have to declare their all taxable income to tax authorities. Indian tax authorities amended the tax return form last year, making it mandatory for filers to disclose transactions such as property purchase or sale above Rs 30 lakh, credit card spend of over Rs 2 lakh, mutual fund investments of more than Rs 2 lakh and investment above Rs 5 lakh in RBI bonds, company equity or debentures.

Tax authorities have independent access to information on these transactions through annual information return, filed by third parties or entities such as banks, mutual funds, registrar of properties and others responsible for carrying out these transactions. However, disclosure of details of bank accounts held abroad in the tax return is still not required in India. A former chief commissioner of income tax, K V M Pai, recently made a recommendation to the Central Board of Direct Taxes to include a column in the tax return form seeking information on bank accounts in foreign countries.

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