US tax authorities may soon get access to all significant assets and accounts held by American citizens and companies with banks and other financial sector entities in India, and a draft inter-government agreement in this regard is currently being vetted by the Sebi.

The proposed agreement is part of the US administration’s efforts to combat any possible tax evasion by its residents through foreign accounts in India and other countries.

The US is signing these agreements with different countries under a three-year-old law, known as the Foreign Account Tax Compliance Act (FATCA), which is aimed at combating tax evasion by US persons and companies holding accounts and other financial assets abroad.

According to a senior official, a draft Inter-Government Agreement (IGA) is currently under consideration of India’s capital markets regulator SEBI, which oversees a major part of the financial services sector.

The Finance Ministry has already asked banking regulator RBI for its views and suggestions on the proposed IGA.

A final IGA would be prepared by the Finance Ministry after taking into account the views and suggestions of SEBI, RBI and other stakeholders and the FATCA agreement should be implemented by the deadline of January 1, 2014, he said.

Once implemented, the agreement would provide the US tax department, the Internal Revenue Service (IRS), an access to details of all offshore accounts and assets beyond a threshold limit held by Americans here, while a reciprocal arrangement could be offered for the Indian authorities as well.

Starting from $50,000, the threshold limits would vary for different classes of entities.

The US has already signed similar bilateral agreements with the UK, Switzerland and a few more countries, while talks are on with over 50 jurisdictions, including India.

The US was earlier expecting to sign an IGA with India under FATCA by the end of 2012 itself, but the matter has got delayed due to the significant implications its implementation and compliance might have for banks and other financial sector entities here.

The US has proposed two model IGAs under the FATCA law — the one provides for the financial institutions directly reporting the required details to the IRS and the other involves the details being shared through the government of the jurisdiction consideration.

However, certain types of assets, accounts and entities could be exempted from the compliance to the provisions of FATCA pact, including those related to retirement funds, certain insurance funds and the government agencies. It is also being considered whether the accounts and certain assets of the NRIs, who might be US citizens, should be exempted.

Once the FATCA pact is implemented, the non-compliant entities and persons would be subject to heavy penalties.

Besides, the foreign financial institutions would be required to charge a withholding tax on their complaints that are in default of the FATCA Act in the US and submit the same to the IRS.

Sources said that implementation of any of the two IGA models would involve major changes in the way banks and other financial sector entities maintain their client and business data, as the current practices do not necessarily involve capturing of separate data for the US clients.

In the capital markets, the brokerages and other entities would need to implement systems that could provide for automatic collection of data related to their US clients with assets or account balances beyond specified threshold limits.

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