In its latest circular, the Ministry of Finance has instructed financial institutions, like mutual funds, insurance and banks, to freeze accounts, which are non-FATCA compliant instead of closing them.
Foreign Account Tax Compliance Act (FATCA) is an anti-tax evasion law under which fund houses are required to report information on US investors to US IRS (Internal Revenue Service) through CBDT. India has agreed ‘in substance’ to FATCA by signing an Intergovernmental Agreement Model 1 (IGA-1) with the US, in effect from July 9, 2015. Simply put, the legislation is meant to prevent wealthy US individuals from parking money overseas to avoid paying taxes.
The ministry has directed fund houses to comply with FATCA regulations before April 30, 2017. This means, non-FATCA compliant investors cannot execute mutual fund transactions from May 1.
“Queries are being received from the financial institutions regarding the revised time lines for completion of due diligence. The financial institutions are advised that all efforts should be made by the financial institutions to obtain the self-certification. The account holders may be informed that, in case self-certifications are not provided till 30 April 2017, the accounts would be blocked, which would mean that the financial institution would prohibit the account holder from effecting any transaction with respect to such accounts. The transactions by the account holder in such blocked accounts may, thereafter, be permitted once the self-certification is obtained and due diligence completed,” the circular states.
Fund officials say that while investments in MFs by US citizens are not significant, the FATCA rule, which requires them to take self-declaration from domestic investors, is posing a problem as they have substantial amount of money invested in MFs.
Investors who have invested in mutual funds after August 31, 2015 are FATCA compliant since fund houses insist investors to submit a self-declaration form before initiating any transaction. All registrar and transfer agents have, in fact, introduced online facility for distributors and investors to update their FATCA information.
The problem is with the accounts opened between July 1, 2014 and August 31, 2015. A CEO of a foreign fund house said that the move would affect large fund houses (top 15 AMCs in terms of AUM) as they have old assets.
