Introduction

Pursuant to the inter-government agreement between India and USA, Income tax Rules were amended on 7th August 2015, by inserting rules 114F, 114G and 114H. The requirement of reporting under the Income-tax Rules is imposed by rules 114G (7) and (8).

The RBI issued its 28th August 2015 Circular BR.AML.BC.No.36/14.01.001/2015-16, drawing the attention of all “financial institutions” covered by the said Income-tax Rules.

What is a Financial Institution?

Meaning of “financial institution” The obligation under the Income-tax Rules is cast upon a “financial institution”, as defined in rule 114F (3). There are 4 types of financial institutions under the Rules which includes Depository Institutions and Investment Entities.

A “Depository Institution” is an institution that accepts deposits in the ordinary course of banking or similar business. All banks are covered by this expression. The expression also covers deposit-taking NBFCs.

“Investment entity” is defined to mean an entity that (A) primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer, namely:- (i) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading; or (ii) individual and collective portfolio management; or (iii) otherwise investing, administering, or managing financial assets or money on behalf of other persons; or (B) if its income is primarily from investing, reinvesting or trading in financial assets, if the entity is managed by another entity, which, in turn, is otherwise covered by the definition of “financial institution”

Reporting financial Institution – Under FATCA

If the entity comes under the definition of “financial institution” then it has to see whether it is a ‘reporting financial institution’ or not.

A reporting financial institution is financial institution which is not a non-reporting financial institution.

Non reporting financial institution

There are certain FIs which are not required to maintain or report the information. These FIs are called non-reporting financial institutions (NRFIs) and defined in Rule 114F(5) of Income Tax Rules

This is an exempting clause, exempting several financial institutions from the reporting requirements.

A “non-reporting financial institution” means any financial institution that is,-

(a) A Governmental entity, International Organisation or Central Bank, other than with respect to a payment that is derived from an obligation held in connection with a commercial financial activity of a type engaged in by a specified insurance company, custodial institution, or depository institution;

(b) a Treaty Qualified Retirement Fund; a Broad Participation Retirement Fund; a Narrow Participation Retirement Fund; or a Pension Fund of a Governmental entity, International Organization or Central Bank;

(c) a non-public fund of the armed forces, Employees’ State Insurance Fund, a gratuity fund or a provident fund;

(d) an entity that is an Indian financial institution only because it is an investment entity, provided that each direct holder of an equity interest in the entity is a financial institution referred to in sub-clauses (a) to (c), and each direct holder of a debt interest in such entity is either a depository institution (with respect to a loan made to such entity) or a financial institution referred to in sub-clauses (a) to (c);

(e) a qualified credit card issuer;

(f) an investment entity established in India that is a financial institution only because it,- (I) renders investment advice to, and acts on behalf of; or (II) manages portfolios for, and acts on behalf of; or (III) executes trades on behalf of, a customer for the purposes of investing, managing, or administering funds or securities deposited in the name of the customer with a financial institution other than a non-participating financial institution;

(g) an exempt collective investment vehicle;

(h) a trust established under any law for the time being in force to the extent that the trustee of the trust is a reporting financial institution and reports all information required to be reported under rule 114G with respect to all reportable accounts of the trust;

(i) a financial institution with a local client base;

(j) a local bank;

(k) a financial institution with only low-value accounts;

(l) sponsored investment entity and controlled foreign corporation, in case of any U.S. reportable account; or

(m) sponsored closely held investment vehicle, in case of any U.S. reportable account

Conclusion – Condition for Reporting Requirement –

If the financial entity is

• covered in the definition of “financial institution” and
• is not excluded from the reporting requirements by virtue of being a “non-reporting financial institution”

are required to meet the reporting requirements under the Income-tax rules 114F, 114G and 114H i.e., Foreign Account Tax Compliance Act (FATCA).

Considering the provision mentioned above NBFC that accepts deposits in the course of a banking business, or a similar business as mentioned in the definition of a depository institution, will be considered a Depository Institution, and is required to report accordingly.

Disclaimer:  This is an effort by Lexcomply.com, to contribute towards improving compliance management regime. User is advised not to construe this service as legal opinion and is advisable to take a view of subject experts.