From 2014, the Income Tax Act has made it mandatory for any financial institution to submit a statement for any specified financial transaction or a reportable account and introduced penalty of Rs. 50,000 for inaccurate submissions.
As a result, FATCA/CRS declaration was made part of the updated KYC (Know Your Customer) procedures for collecting required information.
The information was collected on self-certification basis but no penalty was specified for submitting a false self-certification by account holders which led to furnishing of an incorrect statement by financial institutions.
To make the account holder responsible for his self certification, this budget introduced additional penalty of Rs. 5,000 for any inaccuracy due to false or inaccurate information submitted by the account holder. While the penalty is on the financial institutions, they are also allowed to recover the amount from the account holder.
In short, if an NRI or a Resident does not provide or provides inaccurate detail regarding their citizenship, residential status, country of tax residency on KYC, FATCA/CRS form, every joint holder will have to pay penalty of Rs. 5000.
Also, as the reporting by financial institutions to IT department is made annually, the penalty of Rs. 5000 will also be levied every year. So, while KYC was done years ago and is not updated and if the bank provide incorrect (old) information every year, penalty of Rs. 5000 per year is to be paid.
Now, it is important for an account holder/ investor to keep his KYC updated as per correct residential status under FEMA and also to include name of all the countries where he/she is considered tax resident.
As a result,
- OCI card holder living in India need to maintain resident account. He is not allowed to have NRO or NRE or renew FCNR FD.
- Person leaving India for education, job or immigration must inform bank and change resident account to NRO. Also, MF, DP, PMS, AIF and other institutions need to be informed of the change in status.
Make No Mistake. Penalty is not just 5,000. The Penalty can be HUGE for someone who maintain 3 bank accounts, 10 mutual funds, 2 brokers, 2 DP, 3 insurance policies with different companies as investment. The penalty in such case could be Rs. 100,000 (20 x 5000) EVERY YEAR as respective institutions would be reporting separately to the IT department. Also, if any account is held jointly, the penalty would apply to ALL joint holders.
Additionally, all the information in KYC and FATCA/KYC must be accurate. Entering wrong citizenship or writing Passport number for Tax ID number could also attract Penalty.
Now, it is CRITICALLY IMPORTANT for everyone to keep their KYC updated as per FEMA, update Tax Residency status in FATCA/CRS and most importantly, provide accurate information.
Disclaimer: This is our interpretation of the proposal which may or may not pass as a law and may not be implemented. Our intention is not to scare anyone but to increase compliance. We have been advising our clients about correct FEMA residency status and updating KYC with accurate information since 2014. We are not responsible for anything.
