MM TAX CLUB

In an era of global economic integration, tax transparency has emerged as a cornerstone of financial accountability. To tackle the challenges of tax evasion and ensure accurate disclosure of global income and assets, frameworks like the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA) have been implemented worldwide. These initiatives aim to create a transparent system where tax authorities collaborate internationally, holding taxpayers accountable for their global financial activities. India has actively embraced these frameworks, enhancing its ability to monitor and regulate undisclosed foreign assets and income. Here, we delve into the details of CRS, FATCA, and the critical obligations they impose on Indian taxpayers.

What Are CRS and FATCA?

1. CRS (Common Reporting Standard):

   • An initiative by the Organisation for Economic Co-operation and Development (OECD), CRS is designed to promote global tax transparency.

   • Under CRS, financial institutions are mandated to report information about accounts held by foreign residents to their respective tax authorities. This information is then exchanged with other jurisdictions annually, fostering a robust system to track undisclosed global income.

2. FATCA (Foreign Account Tax Compliance Act):

   • Enacted by the United States, FATCA requires foreign financial institutions to disclose details of financial accounts held by U.S. taxpayers to the Internal Revenue Service (IRS).

   • While CRS has a global scope, FATCA focuses on U.S. taxpayers and their financial activities abroad.

Both frameworks collectively strengthen the global fight against tax evasion and ensure financial accountability.

How India Leverages CRS and FATCA

Under the CRS and FATCA frameworks, India receives detailed information about financial accounts held by its residents in foreign jurisdictions. This data includes:

• Personal Information: Account holder’s name, address, and Tax Identification Number (TIN).

• Financial Information: Account numbers, balances, and income details such as interest, dividends, and other proceeds.

The Income Tax Department uses this information to identify discrepancies, ensuring that taxpayers accurately report their global income. Such data-sharing mechanisms empower authorities to take action against non-compliance and prevent the erosion of the national tax base.

Disclosure Obligations for Indian Taxpayers

Indian residents are legally required to disclose their foreign assets and income in their Income Tax Returns (ITR). The relevant sections include:

1. Schedule FA (Foreign Assets):

   • This schedule is designed for reporting all foreign assets held during the financial year, including bank accounts, investments, properties, and trusts.

2. Schedule FSI (Foreign Source Income):

   • Taxpayers must report income generated from foreign sources and mention the specific head under which this income is accounted for in the ITR.

3. Schedule TR (Tax Relief):

   • Taxpayers can claim relief for taxes paid abroad to avoid double taxation. This requires providing details of the tax paid, the applicable Double Taxation Avoidance Agreement (DTAA) article, and supporting documentation.

Failure to disclose foreign assets or income can attract severe penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. This law underscores the importance of accurate reporting and compliance with global tax standards.

Benefits of Transparent Tax Practices

Transparency in tax reporting extends beyond compliance, offering several advantages:

1. Legal and Financial Security:

   • Full disclosure of foreign assets and income shields taxpayers from penalties and legal actions. It also minimizes the risk of scrutiny by tax authorities.

2. Optimized Tax Liabilities:

   • Accurate reporting enables taxpayers to claim tax relief for taxes paid abroad, preventing double taxation and reducing overall tax liabilities.

3. Contribution to National Development:

   • By declaring and paying the correct amount of taxes, individuals contribute to public welfare initiatives, infrastructure development, and nation-building.

4. Enhanced Credibility:

   • A transparent approach to tax compliance demonstrates good governance and builds trust with financial and regulatory institutions.

Filing Revised Returns: An Opportunity to Rectify

For taxpayers who may have overlooked disclosing foreign assets or income, the Income Tax Department provides an opportunity to correct these omissions through revised returns. For the Assessment Year 2024-25, the deadline for filing revised returns has been extended to January 15, 2025.

Key benefits of filing a revised return include:

• Ensuring complete and accurate disclosure of foreign assets and income.

• Avoiding penalties and legal consequences associated with non-disclosure.

• Availing eligible tax reliefs under Indian tax laws and applicable DTAA provisions.

This proactive step allows taxpayers to align with compliance standards and maintain a clear conscience.

Step-by-Step Guidance for Compliance

To facilitate compliance, the Income Tax Department offers detailed instructions for filling out relevant schedules in the ITR:

1. Schedule FSI:

   • Report all foreign-sourced income and specify the associated tax relief. Include country codes, Taxpayer Identification Numbers (TIN), and details of taxes paid abroad.

2. Schedule TR:

   • Summarize the tax relief claimed, specifying the provisions under which relief is claimed (e.g., Section 90, 90A, or 91).

3. Schedule FA:

   • Furnish details of foreign assets, such as depository accounts, properties, trusts, and other financial interests. Convert all amounts to Indian currency using the telegraphic transfer buying rate as prescribed.

By meticulously filling these schedules, taxpayers can ensure full compliance with Indian tax laws and global reporting standards.

Final Thoughts

The implementation of CRS and FATCA marks a significant milestone in the journey toward global tax transparency. For Indian taxpayers, these frameworks represent an opportunity to demonstrate financial integrity, avoid legal complications, and contribute to national development. By disclosing foreign assets and income accurately and filing revised returns when necessary, taxpayers can maintain compliance, secure tax benefits, and uphold their civic responsibilities.

As deadlines approach, it is crucial to act promptly. If you have foreign assets or income, ensure that your ITR is complete, transparent, and compliant. Tax transparency is not just about avoiding penalties—it is about fostering trust, contributing to societal progress, and building a robust financial future.